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Judgment
Srinivasan, J.—M/s. Sakthi Sugars Limited, the respondent herein, was registered on 12th May, 1961 as a Public Limited Company. The
authorised capital of the company is Rs. 20,00,00,000 divided into 1,50,00,000 lakhs equity shares of Rs. 10 each and 5,00,000 Redeemable
Cumulative Preference shares of Rs. 100 each. The issued capital as on 31.3.1993 was 11.98 crores rupees and as on 31.3.1994. Rs. 15.48
crores. The subscribed and paid up capital as on 31.3.1993 was Rs. l 1.86 crores and Rs. 15.36 crores on 31.3.1994.
2.. M/s. Sakthi Soyas Limited is a public Limited Company, Registered on 26.3.1986 with an authorised capital of Rs. l1,00,000,000 divided into
90,00,000 equity shares of Rs. 10 each and 2,00,000 redeemable Cumulative Preference Shares of Rs. 100 each. The issued subscribed and paid
up capital as on 31.3.1993 and 31.3.1994 is Rs. 8.15 crores. Hereinafter this company will be referred as ''the transferor company.
In a meeting of the Board of Directors of the respondent- company. held on 27.2.1994, it was decided to amalgamate the transferor company
with the respondent as it was considered to be advantageous and beneficial to both the companies. In the opinion of the Directors such merger will
enable the respondent to diversify its activities into a very good area with enormous potential for growth and also the transferor company to get
adequate financial help. Similarly, in a meeting held on 29.3.1994, the Board of Directors of the transferor company decided to amalgamate the
same with the respondent for the same reason. It should be mentioned that both the companies have a common Managing Director and they
belong to the same Group (Sakthi Group of Companies). The transferor company filed C.A. No. 263 of 1994 in this Court for necessary
directions for convening and conducting an Extra-ordinary General Meeting of the Shareholders to consider the proposed scheme of
Amalgamation. The respondent filed C.A. No. 264 of 1994 for similar direction. By order dated 8.4.1994, the Court direct convening of a
meeting of the Equity Shareholders of the respective companies for the purpose of considering the scheme and appointed Sri N.V. Kumar,
Advocate, Coimbatore, as Chairman of the Meeting. Pursuant thereto, notices were sent to all the equity shareholders along with copies of the
proposed scheme of amalgamation besides statements u/s 393 of the Companies Act as well as Forms of Proxy. The notice was also published in
one issue of ""News Today"" and one issue of ""Malai Murasu"". The meeting of the transferor company was held on 13.5.1994 and of the
respondent- company on 20.5.1994. Resolutions were passed in both the meetings approving the Scheme of Amalgamation subject to the
approval of the Financial Institutions and such other necessary approvals. The respective Board of Directors was authorised to take all such steps
as may be necessary or desirable to give effect to the scheme of Amalgamation. It was also resolved to accept such alterations, modifications
and/or conditions, if any, which may be proposed, required or imposed by this Court while sanctioning the scheme. The Advocate/Chairman filed
a report in the court on 21.5.1994.
Thereafter, C.P. Nos. 88 and 89 of 1994 were filed on 14.6.1994 respectively by the respondent and the transferor company under Secs. 391
and 394 of the Companies Act for sanctioning the scheme of Amalgamation and dissolution of the Transferor company, without being wound up.
The benefits of amalgamation as set out in the petitions are as follows:
(i) The respondent herein has been diversifying and strengthening its base. It is considered that the products from soya beans will be an excellent
area for diversification which is allied to the main activity of the respondent- company.
(ii) The benefit of the established respondent-company with accepted product and well organised network will help both the transferor company
and the dynamic respondent- company.
(iii) The transferor company has developed good markets for its products, especially the protein rich soyaflour. The advantage of this development
has not been enjoyed by the transferor company so far for want of sufficient working capital. This amalgamation would therefore be beneficial to
both companies as it will enable the transferor company to get adequate financial help. Further, the respondent- company will be able to diversify
into a very good area with enormous potential for growth.
(iv) This amalgamation would enable the respondent- company to employ its financial resources to the fullest extent. Further, the managerial,
technical and marketing expertise of both the companies would complement each other beneficially.
The salient features of the scheme are that the assets and liabilities of the transferor company would become the assets and liabilities of the
respondent with effect from 1.4.1993 and the equity shareholders of the transferor company will get two equity shares at a premium of Rs. 40 per
share of the respondent as fully paid up for every ten equity shares of the transferor company held by them. It is averred in the petitions that the
assets of the respondent are adequate to discharge and satisfy all the binding obligations of the transferor company and the creditors thereof will
not be prejudiced in any manner by the scheme of amalgamation. It is also averred that the fixed assets of the transferor company were revalued
on 31.3.1993 and the same was duly approved and adopted by its shareholders at their Annual General Meetings held on 9.8.1993.
The appellant herein, which is a society, registered under the Societies Registration Act, claiming to represent the interests of 16,000 cane
growers who supply sugarcane to the respondent for crushing and conversion. l/6th of whom were also shareholders of the respondent and that it
is vitally interested in the financial viability of the respondent, filed a notice of opposition setting out the grounds of opposition. The main crux of the
opposition is that the respondent never had liquid resources to pay the legitimate dues of sugarcane growers and the amalgamation will be highly
detrimental to the interests of the members of the society and it will also result in financial ruin of the respondent, which in turn will seriously affect
the sugarcane price payable to the growers. It is further stated as follows: The transferor company has become commercially insolvent and it would
be difficult to revive the same within the next two or three years. Even after amalgamation, it will continue to be in a position of perennial loss and it
would be a serious drain on the resources of the respondent. If the two companies are amalgamated, the net liability of the amalgamated company
will be a staggering sum of Rs. l16.68 crores and the interest burden on that amount will cripple the respondent. The entire profit earned by the
respondent will be wiped out in view of the additional burden. The foundry division and pharmaceutical division of the respondent are not doing
well at all and there is no possibility of their improving. The respondent has also taken on lease a sugar mill at Baramba in Orissa State on a lease
amount of rupees one crore per year. Another unit has been started at Dhenkanal, Orissa. Though the plant capacity is 2500 tonnes per day, the
actual output works out only to 360 tonnes. Thus, the transferor company has serious problems in its existing units and there is no explanation as to
how the amalgamation will improve the financial working of the transferor. The burden is on the transferor to prove . that the scheme is fair and
reasonable. In the explanatory statement and other documents, no material has been placed to justify the amalgamation. No reasonable man of
business will approve of the amalgamation. It will have adverse impact on the majority shareholders, who are also cane-growers and whose
survival depends upon the income derived from the respondent- company. The petition is mala fide and the proposal is only to protect the interest
of a few Directors who have given personal guarantee in favour of the financial institutions for loans taken by the transferor company. On the
aforesaid averments, the appellant prayed for dismissal of the petitions.
The appellant also filed C.A. Nos. 959 and 960 of 1994 praying to set aside the report of the Advocate-Chairman dated 21.5.1994 and to
appoint a Chairman to convene a fresh meeting of the shareholders of the respondent- company under the provisions of Companies (Court) Rules.
1959. The appellant also filed C.A. No. 999 of 1994 praying to pass an order to appoint a Chairman to convene a fresh meeting of the creditors
of the respondent at the registered office of the company after issue of notices to the creditors for the purpose of considering and if it thought fit
approving the scheme of Amalgamation of the companies and consequently directing the said Chairman to file a report of the said meetjng into this
Court.
C.A. Nos. 959 and 960 of 1994 were dismissed by an elaborate order by Jayasimha Babu, J. on 21.10.1994. The learned Judge found that
the approval of the proposal has to be regarded as approval by members"" who fairly represented the General Body of the shareholders of the
company. The learned Judge rejected the contentions of the appellant that the meeting did not satisfy the requirements of the law. The learned
Judge also hold that no material was placed before him to prove lack of good faith of the majority which passed the resolution. On the same day,
the learned Judge dismissed C.A. No. 999 of 1994 by a separate order, in which he held that the sugarcane growers who supplied sugarcane to
the respondent are not the creditors of the respondent and they have no locus standi to seek a direction to convene a meeting of the creditors as
they are themselves not affected by the scheme insofar as it concerns creditors. The learned Judge also pointed out that no creditor of the
respondent- company applied for convening a meeting of the creditors. The two orders of the learned Judge have not been challenged either
before us or otherwise.
C.P.Nos. 88 and 89 of 1994 were heard thereafter and Venkatachalam, J. passed an order on 4.1.1995 approving the scheme of
amalgamation, and directing the Official Liquidator, High Court, Madras to file a report within three months therefrom regarding the affairs of the
transferor company with a view to enable the court to dissolve the said company without winding up and holding that the scheme of amalgamation
shall come into effect from 1.4.1993. In the judgment, the learned Judge has referred to the statement made by learned Counsel for the Central
Government that he had no objection to the scheme being sanctioned by the court. The learned Judge has also referred to the fact that the only
contesting party is the appellant herein. Aggrieved by the said order, the appellant has preferred this appeal.
Learned counsel for the appellant has while repeating the contentions advanced before the learned single judge, submitted that the respondent
is guilty of suppression of material facts and on that ground alone the scheme should have been rejected. He has also argued that no reasonable
man of business will approve of the proposal in view of the heavy liabilities. The proposed scheme is against the public interest as it affects the
livelihood of farmers i.e., Sugarcane growers. According to learned Counsel, the object with which the amalgamation is proposed can be achieved
by other methods and the court should not in such cases approve of amalgamation. Finally it is contended by learned Counsel that the court ought
not to have passed the order sanctioning the amalgamation without first obtaining the report of the official liquidator as regards the affairs of the
transferor company. According to him, such a report is a pre-condition under the second proviso to Section 394(1) of the Companies Act.
Per Contra, learned Counsel for the respondent has submitted that the amalgamation is in the interest of both the companies and so long as it is
fair and reasonable, the court has to accept the same. According to him, in the absence of any fraud or mala fide, the court will not substitute its
own views with regard to economic soundness of the proposal when the required majority of the shareholders has approved of the same. It is
contended by him that each case has to be decided on the facts and circumstances thereof and not on any hard and fast rule based on general
principles. It is submitted that there is no suppression of any material fact, either before the shareholders or before the court. According to him, all
the relevant particulars and records have been made available and there is no merit in the contentions of the appellant. It is also pointed out by him
that the farmers or sugarcane growers are in no way affected by the amalgamation and their interests are fully safeguarded by the relevant
Government Orders and even if the company incurs a loss, the farmers, will not suffer in any manner as they will get their dues intact. As regards
the report of the official liquidator, it is argued by him that the practice prevailing in this Court has throughout been the same and it does not offend
the provisions of the second proviso to Section 394(1) of the Companies Act.
Before considering the merits of the contentions, it will be better to refer to the relevant provisions, of law and the principles laid down in the
judgments cited by both sides. Section 391 of the Companies Act provides that the court may order a meeting of the creditors or members to be
called, held and conducted in such manner as it directs. where a compromise or arrangement is proposed between a company and its creditors or
between a company and its members and an application is filed by the company or creditor or member or the liquidator in the case of a company
which is being wound up. Sub-section (2) of the said section is to the effect that if a majority in number representing three fourths in value of the
creditors or members, as the case may be present and voting, either in person or by proxy, at the meeting, agree to any compromise or
arrangement, the same shall, if sanctioned by the court, be binding on all the creditors or all the members and also on the company. The proviso to
Sub-section (2) reads thus:
Provided that no order sanctioning any compromise or arrangement shall be made by the court 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 Secs. 235 to 251 and the like.
Section 394 provides for the matters for which the court may make provision, either by the order sanctioning the compromise or arrangement,
or by a subsequent order, where it is shown to the court in an application u/s 391 that the compromise or arrangement has been proposed for the
purposes of or in connection with a scheme for the reconstruction of any company or companies or amalgamation of any two or more companies
and that under the scheme, the whole or any part of the undertaking, property or liabilities of any company concerned in the scheme, referred to as
a transferor company, is to be transferred to another company, referred to as a transferee company. Under the first proviso to Sub-section (1), no
compromise or arrangement proposed for the purposes of and in connection with a scheme for amalgamation of the company which is being
wound up with any other company or companies, shall be sanctioned by the court unless the court has received a report from the Company Law
Board or the Registrar that the affairs of the company have not been conducted in a manner prejudicial to the interest of the members or to public
interest. The second proviso to Sub-section (1), which is relevant in this case, reads as follows:
Provided further that no order for the dissolution of any transferor company under Clause (iv) shall be made by the court unless the official
liquidator has, on scrutiny of the books and papers of the company, made a report to the court that the affairs of the company have not been
conducted in a manner prejudicial to the interests of its members or to public interest.
In The Calicut Bank Limited (In liquidation) v. Devani Ammal and others, 10 C.C. 78, a Division Bench of this Court held that the fact that the
shareholders and creditors of a company have approved of a scheme of compromise or arrangement as contemplated by Section 153 of the
Indian Companies Act, 1913, does not mean that the court is bound to accept the scheme and that the duty of the court is to examine and decide
whether the terms are fair and reasonable, taking every thing into consideration. The Division Bench said that the shareholders and creditors have
approved of a scheme will of course carry weight but there may be more important considerations. On the facts the court found that the approval
of the scheme was based on misrepresentation as to the position of the bank and there were allegations of mismanagement and consequently the
scheme was rejected.
The Calcutta High Court has In the matter of Calcutta Industrial Bank Limited, 18 C.C. 144, observed that the court must look at the
surrounding circumstances which led to the proposal of the scheme, see whether the directions of the court and the requirements of the statute
were properly carried out and the meetings were properly convened and conducted and whether the matter was considered from the proper point
of view of relevant facts fairly dislosed and put before the meetings and what is more, be satisfied that the scheme is a fair scheme and that there is
no reasonable objection to it. The court also said that the scheme will be rejected if it is brought to its notice and if it is satisfied that there has been
any material oversight or miscarriage or that the material facts were intentionally withheld from or otherwise not placed before the meetings.
A Division Bench of the Bombay High Court has in J.S. Davar and Another Vs. Shankar Vishnu Marathe and Others, , reiterated that the
consent of the majority of creditors or shareholders to a scheme does not conclude the issue but the view of the majority is one element in the case
though a very important one which must be taken into account in sanctioning the scheme. The Bench said:
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 submitt 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 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 cannot 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 decision of the majority were not known or disclosed in 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. Considerations such as those mentioned above must be taken into account by a court
before a scheme is sanctioned but in the very nature of things, it is not possible to enumerate exhaustively the circumstances which a court is
entitled to take into consideration.
In Maneckchowk and Ahmedabad Manufacturing Company Limited, In re. 40 C.C. 819, the Court rejected a contention that disclosure of
material facts should be made at the initial stage when the application is made u/s 391(1) and held that they are required to be made when a
petition is filed u/s 391(2) for sanctioning the scheme to find out whether sanction should be accorded to it or not.
In Navjivan Mills Company Limited, Kalol. In re. 42 C.C. 265, a learned single Judge of the Gujarat High Court has set out the well
recognised limitations of the court''s power to sanction a scheme in the following words:
First limitation is that the court would not sanction a scheme which would be invalid without the court''s sanction if every creditor or member
concerned agreed to it. In other words, the court has no power to sanction something which the parties could not do by agreement. The second
fetter on the court''s power is that the court cannot sanction an act being done if the law permits it only subject to conditions such as where the
scheme of compromise and arrangement also includes within its ambit reduction in share capital in respect of which special procedure provided in
the Act and the rules has not been carried out. Third known fetter on the court''s power is that the court would not ordinarily sanction a scheme
which includes something which can ordinarily be effected by resort to other provisions of the Companies Act. ""Within the limitations set out
above, the court will allow the companies the greatest freedom in devising schemes to suit their requirements and will approve those schemes if
they are fair to all whose interests are affected.
The learned Judge has also said.
As stated at the outset, the court, before according its sanction to the scheme of compromise and arrangements, must be satisfied that the
provisions of the statute have been complied with; 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 that the arrangement is such as an intelligent and honest man, a member of the class concerned and acting in respect of his interest,
might reason-ably approve. That is the well recognised approach of the court to a scheme of compromise and arrangement. The scheme should
not be examined in the. way a carpingee critic, a hairsplitting expert, a meticulous accountant or a fastidious counsel would do it. It must be tested
from the point of view of an ordinary reasonable share holder acting in a business-like manner taking within his comprehension and hearing in mind
all the circumstances prevailing at the time when the meeting was called upon to consider the scheme in question (vide: In re. Sidhpur Mills Co.
Ltd. AIR 1962 Guj. 505.
The same learned Judge has in Wood Polymer Limited, In re. 47 C.C. 597, held that if the only purpose discernible behind the amalgamation
is defeating tax by creating a paper company and transferring an asset to such company which can without consequence be amalgamated with
another company to whom the capital asset was to be transferred to that on amalgamation it may pass on to the amalgamating company, it would
distinctly appear that the provision for such a scheme of amalgamation was utilised for the avowed object of defeating tax. The learned Judge held
that in such cases, the court will not be a party to an arrangement for avoiding payment of tax by sanctioning the scheme.
In In re. Alembic Chemical Works Co. Ltd. 64 C.C. 186, another learned Judge of the Gujarat High Court held that while the court is not
supposed to set its seal upon the decision of the majority it is also not supposed to scrutinise the scheme with a fine toothed comb to find out flaws
and then to view them through a magnifying glass. The learned judge said that the court must be satisfied that the majority vote was honestly
obtained and no financial or arithmetical jugglery was perpetrated either upon the creditors or upon the shareholders to cajole them or coax them
into voting in favour of the scheme The learned Judge observed:
However the scheme is not to be scrutinised by the court with the eye of an exactness of an accountant but if the scheme is, broadly speaking,
calculated to benefit the company as a whole, it would be entitled to the sanction of the court. In the instant case, the explanatory statement which
was sent along with the notice of the meeting is very much on the record and while flaws can be found in the said statement, it does appear on a
perusal of the same that all the necessary materials which would have enabled the shareholder and the creditors to contribute their instructed
judgment over the merits or demerits of the scheme were incorporated in the said statement.
The following principles can be culled out from the aforesaid rulings:
(1) The court has to be satisfied that the resolutions have been passed by the requisite majority as prescribed in the statute at a meeting duly
convened.
(2) The court is not a mere rubber stamp and the fact that the majority has approved of the scheme is not conclusive.
(3) The approval by the majority is an important factor to be considered by the court.
(4) The court must be satisfied that all material facts have been disclosed at the meeting and before the court.
(5) The scheme is not for an oblique purpose to defeat the provisions of any law.
(6) The object cannot be achieved by resort to the other provisions of the Companies Act.
(7) The scheme as a whole is fair and reasonable and not vitiated by bad faith, fraud or mala fide and once the court is satisfied to that effect, the
court should not substitute the decision of the majority with its own views.
Bearing the above principles in mind, we shall now examine the present case. The first contention of the appellant that the material facts are not
disclosed either at the meeting or before the court is unsustainable. Counsel on both sides have taken us through the entire records. We find that
none of the facts which according to the appellant have not been disclosed, has been omitted to be set out detail by the respondent in the affidavits
filed before the court. It will be an unnecessary exercise to repeat the contents of those affidavits. As regards the alleged staggering liability in a sum
of Rs. l16.78 crores in the event of amalgamation, one of the Directors of the respondent- company by name Mr. N.K. Vijayan has pointed out in
his additional counter affidavit that the appellant has omitted to take notice of the market value of the assets of the transferor company as assessed
by professional valuers, which is more than the total liabilities of the said company. It is stated that the value of the assets is more than the liabilities
by 7.27 crores of rupees. It is also submitted that the income from the combined operations of both the companies is sufficient to meet the interest
and other liabilities. With reference to non-viability of the pharmaceutical division of the respondent- company, the Managing Director has stated in
his common affidavit that the unit was only a formulation unit and in paragraph 11 of the Director''s report appearing in the Annual Report for the
year 1992-93, it has been clearly indicated that the continuance of the Division is under consideration in view of the already established competitive
market and prohibitive high costs of development of patent drugs. It is averred that in view of the said reasons, the operation of the Division has
been closed. Our attention is drawn to the Annual Report 1993. At page 8 thereof, para 11 reads follows:
The contribution from this division was not able to absorb the heavy overhead costs. In spite of the efforts, taken by the company in marketing the
products, the results were not encouraging. The continuation of operations of this division is under consideration in view of the already established
competitive markets and prohibitive high cost of development of patent drugs.
Similarly, with reference to the Units in the State of Orissa, in paragraphs 3 to 5 of the same report, the following statement is found:
In Sakthi Nagar Unit 6,87,687 tonnes of sugarcane were crushed. The National Efficiency Award for the season 1989-90 and the prestigious
National Award for Production of High Quality export sugar during the season 1992-93 were awarded to this Unit. In Sivaganga Unit 3.69.658
tonnes of sugarcane were crushed. In Baramba Sugar Unit, 57.812 tonnes of sugarcane were crushed.
The average realisation of free sale sugar price registered improvement. 18.690 metric tonnes of sugar for a value of Rs. 1,558.81 lakhs were
exported. The Central Government announced free sale/levy sale ratio of 60:40 with affect from 1st October, 1992. The general performance of
this division is considered satisfactory.
In the current year, the overall crush is expected to be around 13 lakh tonnes of sugarcane. Dhenkanal Sugar Unit is expected to commence
commercial production during 1993-94 season. Favourable working results are expected in this division.
At page 38. Note (1) to Schedule 25 reads thus:
The Company has taken 1250 TCD Sugar Unit from a Co-operative Society in the State of Orissa under Management Contract.
In the common affidavit of the Managing Director, it is stated as follows:
I further submit that the allegation of the applicant/respondent in ground No. 14 that the transferee- company is facing serious problems with its
existing units at Baramba and at Dhenkanal in Orissa is wholly incorrect. The transferee company has taken over a sugar mill with 250 TCD
capacity at Baramba in Orissa State since January, 1991. As per the terms of the agreement, the transferee company has to pay an annual rent of
Rs. 50 lakhs and not Rs. one crore as erroneously mentioned by the applicant/respondent. I further state that when the Baramba sugar unit was
taken over, there was only 10,000 tonnes of sugarcane to crush. I further submit that the transferee- company has put in vigorous efforts for
extensive cane development in the command area of the factory which has culminated in the improvement of the area under a sugarcane cultivation
to about 4,200 acres ensuring availability of 1,00,000 tonnes of sugarcane for 1994-95 crushing season. I submit further that the new sugar plant
at Dhenkanal in Orissa State with a crushing capacity of 2500 tonnes per day has been completed ""and it took up trial crushing since 31.1.1994.
This plan is to commence regular crushing of sugarcane from November/December, 1994. I further state that to put the installed capacity to
remunerative use till commencement of regular crushing, reprocessing of 12,000 tonnes of raw sugar imported by M/s. Indian Sugar General
Import-Export Corporation Limited on job work basis was taken up.
As regards foundry division of the respondent-company the Managing Director has stated in paragraph 20 of his common affidavit as follows:
I further submit that the allegation of the applicant/respondent in ground No. 13 that the foundry division of the transferee company is not doing
well is contrary to facts and is incorrect. I state that the foundry division is making positive contribution to the profits of the transferee- company
since 1991-92. It is submitted further that the performance of the foundry division is improving over the years and the existing installed capacity of
the foundry division is being fully utilised. The said foundry unit is the sole major source of supply to premier customers like M/s. Maruti Udyog
Limited and M/s. Tractors and Farm Equipments Limited (TAFE). The said foundry division supplies critical components such as steering
knuckles, brake drums, axle housings etc., which are value added products with remunerative prices. I state that M/s. Maruti Udyog Limited have
proposed to double their capacity and production. Therefore to meet the increased requirements the transferee- company has planned to expand
the capacity of the foundry unit.
In paragraph 8 of the Director''s report in the Annual Report 1993, the performance of Foundry Division has been stated to be satisfactory.
There is no merit in the contention that no reasonable man of business would approve of the amalgamation in view of the heavy liabilities. As
stated earlier, the market value of the assets of the transferor company is more than the total liability. The question cannot be decided merely on the
quantum of the liability, but will depend on the future potential of the business of the transferor company. The two companies are agro-based
industries and shrewd businessman may visualise a bright future for both the companies by amalgamating the two so that the resources can be
utilised for the benefit of both. One of the tests is to find out the debt equity ratio as pointed out by the learned Counsel for the respondent. It is
submitted by him that out of the total liability of Rs. l16.88 crores of rupees, of the two companies put together, a sum of Rs. 69.51 crores
represents the term loan liability. The balance of Rs. 47.37 crores was borrowed for meeting the working capital needs against hypothecation of
current assets. The liability representing the working capital varies from month to month according to the stock position of inventories and
receivables. It is submitted by him that the debt equity ratio works out to only 1.1:1 because the term loan being Rs. 69.51 crores the net owned
funds being Rs. 62.97 crores. The profit of the transferree company after taking into account interest on working capital borrowings and interest on
secured and unsecured loans is a sum of Rs. 20.45 crores. Hence, the interest burden will not cripple the transferee company as contended by the
appellant. We agree with the above contentions of learned Counsel for the respondent. As rightly submitted by him, each case has to depend on
the facts and circumstances.
It is contended that the revaluation of the assets of the transferor company is only a jugglery in accounting and is total mala fide. We are unable
to accept this contention. It is brought to our notice by learned Counsel for the respondents that in the proceeding before the Board for industrial
and Financial Reconstruction initiated by the transferor company for any enquiry u/s l5(1) of the Sick Industrial Companies (Special Provisions)
Act, 1985 the revaluation of the assets has been accepted though the application was dismissed as not maintainable in view of the fact that the
transferor company had not completed five years of incorporation as per the amended provisions of the said act. Paragraphs 3 and 4 of the order
of the Board are in the following terms:
Shri Vittal only pleaded that the revaluation of assets as per the definition given in SICA regarding free reserves cannot be treated as free
Reserve and is required to be excluded. On that analogy he maintained that the surplus in revaluation of assets should be taken off while
determining the position relating to accumulated losses.
The Bench observed that the provisions of SICA do not specify any such definition about the treatment of accumulated losses and under the
circumstances the position as reflected in the balance sheet would be construed as the current figure. The balance sheet for the year 1992-93 does
not indicate any accumulated losses and the figure has been shown as nil.
It is pointed out by learned Counsel for the respondent that in that proceeding all the financial institutions being the creditors of the transferor
company were represented. We find from the order that the following institutions were the creditors:
(1) Canara Bank (Lead)
(2) Indian Overseas Bank.
(3) State Bank of Travancore
(4) Lakshmi Vilas Bank Ltd.
(5) The Standard Chartered Bank.
(6) IDBI.
(7) ICICI (Lead) and
(8) T.N. Industrial Development Corporation Limited.
Hence, we do not accept the contention that the revaluation of the assets of the transferor company proves lack of bona fide or that it is an
accounting jugglery.
The next contention of learned Counsel for the appellant that the Scheme is against Public interest as it will affect sugarcane growers is
unsustainable. It is rightly pointed out by the respondent that it enters into an agreement with the sugarcane growers for every season and as per the
agreements, prices is payable as per the provisions of the Sugarcane (Control) Order, 1966. A copy of the English translation of the agreement has
also been placed before the court. A perusal of the same shows that that there is a clear contract to pay at the controlled price as may be
determined by the Government from time to time for the entire quantity of the sugarcane planted or to be planted on the lands mentioned in the
Schedule. The statutory minimum price has to be paid to the sugarcane growers within 14 days from the date of delivery of the sugarcane. That
price is notified by the Central Government from time to time. Later, after the closure of the season, the Central Government notifies additional
price to be paid for the sugarcane under Clause 5A of the Sugarcane (Control) Order.
The State Government further recommends the State advised price. The respondent- company is liable to pay only prices fixed by the Central
Government and though it is not liable to pay the State advised price, it has been paying the same as an ''on account'' payment in instalment. That
amount is adjusted subsequently against the additional price notified by the Central Government under Clause 5A of the Sugar-cine (Control)
Order. The respondent has been making excess payments during 1981-82 to 1990-91 except in 1988-89. The ''on account'' payments are made
at least one year in advance than the statutory requirement of paying the price under Clause 5A of the Sugarcane (Control) Order. Though the
excess of the State advised price over the price notified under Clause 5A by the Central Government can be recovered by the respondent-
company, it has not recovered any such amount as a measure of goodwill to the cane growers. In that manner, the respondent has paid to the cane
growers approximately Rs. 18.6 crores during the three sugar seasons commencing from 1991 -92 over and above the statutory minimum price
which is yet to be adjusted. Hence, there is no question of any prejudice being caused to the sugarcane growers by the amalgamation. We have
already referred to the fact that Jayasimha Babu, J. has held that the sugarcane growers are not creditors. As their apprehended grievance is only
imaginary, there is no question of the scheme being against public interest.
We find that no creditor of the company has come forward with any objection to the scheme. All the financial institutions which have lent
money to the company have agreed to the scheme. It is categorically stated in the affidavit of the Director of the Company viz., Sri N.K. Vijayan
that ICICI, IFCI, State Bank of Travancore, Standard Chartered Bank, Citi bank, N.A., Punjab National Bank, Canara Bank, Indian Overseas
Bank, The Karur Vysya Bank Limited and Canbank Investment Management Services Limited have, after considering the projected results of the
combined operations, granted their consent. The copies of their letters have been filed in court in C.A. No. 999 of 1994.
There is also no merit in the contention that the object sought to be achieved by amalgamation can be achieved by adopting other methods.
Nothing has been placed before us to show that there is any other method which will be more beneficial to the company. It has already been found
in the applications filed by the appellant that the mestings have been held properly after service of notices and publication thereof in accordance
with the statutory requirements. The fact that the majority have accepted the scheme is a relevant matter in this regard. Hence, we reject the
contention of the appellant.
The last contention of the appellant is that a report from the Official Liquidator as regards the affairs of the transferor company is a condition
precedent before the court sanctions amalgamation. Reliance is placed on the second proviso to Section 394(1) of the Companies Act which we
have already extracted. Our attention is drawn to the Judgment of Madhya Pradesh High Court in Kriti Plastics Private Limited, In re. 78 C.C.
The court said,
The Official Liquidator is actually an agency of the court to satisfy itself that the affairs of the company to be dissolved have not been conducted in
a manner prejudicial to the interest of its members and public interest. Therefore, the court has to ascertain that the schemes of amalgamation are
sanctioned only after the court has the other side of the picture before it and the report filed by the official liquidator along with the scheme of
amalgamation leads the court to arrive at a conclusion that in the amalgamation scheme the interests of the shareholders are not jeopardised in any
way and the public interest is not being defeated. Therefore, the report of the Official Liquidator, in all aspects of the matter can be taken into
consideration by the court.
Reference is also made to the judgment of a Full Bench of Kerala High Court in M. Philip v. Malayalam Plantations (1) Limited, 81 C.C. 38.
Construing the second proviso to Section 394(1), the Full Bench observed.
The first proviso says that the scheme of amalgamation pertaining to a company ""which is being wound up"" cannot be sanctioned without a report
from the Company Law Board or the Registrar. The second proviso is with reference to Clause (iv), which relates to ""dissolution, without winding
up of any transferor company"". The Division Bench in Official Liquidator v. Madura Company Private Limited, 1975 K.L.T. 562, held that the
second proviso would apply only in a case where the first proviso applies as the second proviso is intended to function as an additional provision
for safeguarding the interest of the person concerned, over and above the safeguard incorporated in the first proviso. The Division Bench has laid
emphasis on the word ""further"" in the second proviso to arrive at that conclusion.
We do not think that the word ""further"" is employed in the second proviso for denoting that an additional provision is made in a situation covered
by the first proviso. It is not unusual in legislative drafting to use the word ""further"" in a second proviso added to the main section. The purpose is to
indicate that it is yet another proviso. It may be an additional one or it could be entirely separate from the other. The word ""further"" need not
necessarily mean that the proviso is intended to be in conformity with the preceding proviso.
The Bench referred to the judgment of a learned single judge of this Court in Bush Products Limited''s case, (1973) 86 L.W. 243, in which it was
said that the word ""further"" has no special significance and the judgment of Bombay High Court in Sumani Private Limited, In re. (1979) 49 C.C.
547 (Bom.) and extracted passages therefrom. The Full Bench said that the entire observation made by the Bombay High Court cannot be
accepted as correct, though it was in agreement with the conclusion that the two provisos may operate in two different situations and may apply to
two different companies. Referring to the expression ""dissolution"" the Full Bench said that the position in dissolution need not be identical as in
amalgamation and the word ""dissolution"" as used in the Companies Act has a perceptible connotation, intimately, the Full Bench concluded thus:
The survey of the above provisions indicates that the legal process of dissolution can take place after commencement of the steps for winding up.
Dissolution without winding up only means dissolution without completely winding up the company. Thus what is envisaged in Clause (iv) of
Section 394 as ""dissolution without winding up"" need not be the consequence of amalgamation of two companies.
The above rulings do not help the appellant to contend that the report of the official liquidator should be obtained before an order sanctioning
amalgamation is passed. In our opinion, when a company is wound up or liquidated, the first proviso requires a report, on the affairs of the
company prior to amalgamation. In this case, the prayer is for dissolution without winding up the transferor company and the first proviso is not
applicable. In such cases, the order transferring wholly or in part of the undertaking of the transferor company can be made by the court without
reference to the Official Liquidator. The second proviso refers only for the purpose of passing an order of dissolution and not an order sanctioning
amalgamation. The distinction between the two provisos can easily be discerned. While the first proviso requires a report on the affairs of the
company, before sanctioning the scheme of amalgamation, if the company is to be wound up and not otherwise, the second proviso would require
a report of the Official Liquidator before passing an order of dissolution. While the first proviso talks of amalgamation, the second proviso talks of
dissolution. The difference in the language is significant. Hence, in our view, the order passed by the learned Judge sanctioning the amalgamation
and also directing the official liquidator to file his report is quite in accord with the statutory provision contained in Section 394, Companies Act. As
rightly pointed out by learned Counsel for the respondent the consistent practice in this Court has. been to pass orders on amalgamation without
waiting for reports from the Official Liquidator. The practice is not in violation of the statute. Hence, we reject this contention of the appellant.
In the result, all the arguments of the appellant fail and the appeal suffers a dismissal. The appellant shall pay the costs of the respondent in this
appeal. Counsel''s fee Rs. 5,000.