Citation: AIR 1997 SC 506, (1997) 1 SCC 579
Bench: Supreme Court of India : S.B.Majumdar J
- A Scheme of Amalgamation of M/s. Mafatlal Industries Limited [MIL] being the Transferee Company and Mafatlal Fine Spinning and Manufacturing Company Limited [MFL] being the Transferor Company was proposed
- The Learned Single Judge of Gujarat High Court had sanctioned the said scheme in Company Petition No. 22 of 1994.
- Appeal was filed against the impugned Judgment before the Division Bench of High Court of Gujarat in Appeal No. 16 of 1994 and the said Appeal was also dismissed.
- Aggrieved by the Judgment of the Division Bench, the Appellant filed an Appeal by Special Leave before the Supreme Court.
Background Facts of the case:
- Transferor Company: [MFL]:
MFL was incorporated on 20th April 1931 under the Baroda State Companies Act and had been carrying on the business of manufacture and sale of textile piece goods and chemicals. Its registered office was situated at Mafatlal Centre, Nariman Point, Bombay. It was engaged in the manufacture and sale of textiles and fluorine based chemicals.
- Transferee Company: [MIL]:
MIL was incorporated on 20th January 1913 under the name ‘The New Shorrock Spinning & Manufacturing Co. Limited’ and its name was subsequently changed to ‘Mafatlal Industries Limited’ as per the fresh Certificates of Incorporation dated 24th January 1974. Its registered office was situated at Ahmedabad, Gujarat. The objects of MIL includes carrying on all or any of the businesses such as cotton spinners and doublers, wool, silk flax, jute and hemp spinners and doublers etc,.
The appellant who has objected to the amalgamation before the High Court of Gujarat is one of the directors of MFL.
Meeting of shareholders of the Company were convened and the Scheme was approved by the overwhelming majority of shareholders.
Grounds of appeal:
The following four important considerations were raised by the Appellant in the present case.
- Non -Disclosure of Interest of Directors:MIL while placing the scheme before the equity shareholders meeting did not disclose the interest of the directors, namely, Shri Arvind Mafatlal and Shri Hrishikesh Mafatlal in the explanatory statement supporting the Scheme and hence the shareholders were misled and could not come to an informed decision.
- The Scheme is unfair to the minority shareholders
- The appellant represented a distinct class of equity shareholdersso far as the respondent transferee -company is concerned and consequently separate meeting so far as his group is concerned should have been convened by the Company Court.
- Share exchange Ratio was unreasonable:As it provides under the Scheme that two equity shares of the transferee company will be allotted against five equity shares of the transferor- company at their respective face value of Rs. 100/- per share
Points of Law discussed:
Scope and Ambit of Jurisdiction of Company Court:
Broad principles concerned with the Jurisdiction of the Company Court were laid down. While considering and sanctioning the scheme of Amalgamation, the Court has to see,
- That the requisite statutory procedurefor supporting such a scheme has been complied with and that the requisite meetingas contemplated by Section 391(1) (a) have been held.
- That the scheme is backed up by the requisite majority voteas required by Section 391(2).
- That the concerned meetings of the creditors or members or any class of them had the relevant material to enable the voters to arrive at an informed decisionfor approving the scheme in question.
- That all the necessary material indicated by Section 393(1) (a) is placed before the votersat the concerned meetings.
- That all the requisite material contemplated by Section 391(2)of the Act is placed before the Court by the Applicant
- That the proposed scheme of compromise and arrangement is not found to be violative of any provision of law and is not contrary to public policy
- That the Company Court has also to satisfy itself that members or class of members or creditors or class of creditors as the case may be, were acting bona fide and in good faith and were not coercing the minorityin order to promote any interest adverse to that of the latter comprising of the same class whom they purported to represent.
- That the scheme as a whole is also found to be just, fair and reasonable from the point of view of prudent menof business taking a commercial decision beneficial to the class represented by them for whom the scheme is meant.
Once the aforesaid broad parameters about the requirements of a scheme for getting sanction of the Court are found to have been met, the Court will have no further jurisdiction to sit in appeal over
Concept of commercial wisdom: Jurisdiction of Company Court:
- The question whether the Company Court has jurisdiction like an appellate authority to minutely scrutinize the scheme and to arrive at an independent conclusion whether the scheme should be permitted to go through or not when the same is approved by majority of the creditors or members of the company was answered by the Court in negative.
- The following lines are quoted in this regard:
“It is the commercial wisdom of the parties to the scheme who have taken an informed decision about the usefulness and propriety of the scheme by supporting it by the requisite majority vote that has to be kept in view by the Court. The Court certainly would not act as a court of appeal and sit in judgment over the informed view of the concerned parties to the compromise as the same would be in the realm of corporate and commercial wisdom of the concerned parties. The Court has neither the expertise nor the jurisdiction to delve deep into the commercial wisdom exercised by the creditors and members of the company who have ratified the Scheme by the requisite majority. Consequently the Company Court’s jurisdiction to that extent is peripheral and supervisory and not appellate. The Court acts like an umpire in a game of cricket who has to see that both the teams play their according to the rules and do not overstep the limits. But subject to that how best the game is to be played is left to the players and not to the umpire.”
On issues raised:
- On Non – Disclosure of interest of a director:
- This issue was dismissed and the following observations were made in this regard.
“If the special interest which the director has is in any way likely to be affected by the Scheme and if non-disclosure of such an interest is likely to affect the voting pattern of the class of creditors or shareholders who are called upon to vote on the scheme, then only such special interest of the director is required to be communicated to the voters as per Section 393(1) (a).”
- Consequently the interest of Arvind Mafatlal in the share-holding or likely future impact thereon by the litigation was de hors the Scheme in question and was not required to be placed before the voters. Therefore the same is not valid ground of objection.
- On the Scheme being unfair and unreasonable.
- The Supreme Court declared that the Scheme of Compromise and Arrangement is neither unfair nor unreasonable to the minority shareholders represented by the appellant as the scheme was approved by the overwhelming majority of the shareholders of the Company and it is not proved that the interest of the minority is prejudiced by the scheme.
- It was stated that the financial institutions and statutory corporations held substantive percentage of shares in respondent-company. This class of shareholders who are naturally well informed about the business requirements and economic needs and the requirements of corporate finance wholly approved the Scheme if it was contrary to the interest of shareholders as class. The following lines are quoted in this regard:
“It could not be said that the majority shareholders had sacrificed the class interest of appellant minority shareholders when they voted with overwhelming majority in favour of the Scheme.”
- On Appellant’s plea to be treated as a separate class of shareholders:
Quoting Palmer in this Treatise Company Law 24th Edition, it was held that unless a separate and different type of Scheme of Compromise is offered to a sub- class of a class of creditors or shareholders no separate meeting of such sub-class of the main class of members or creditors is required to be convened
- On Valuation of shares:
- In this regard, reference was made to a decision of the Gujarat High Court in Kamala Sugar Mills Limited [55 Company Cases P.308] which dealt with an identical objection about the exchange ratio adopted in the Scheme.
“Once the exchange ratio of the shares of the transferee-company to be allotted to the shareholders of the transferor-company has been worked out by a recognized firm of chartered accountants who are experts in the field of valuation and if no mistake can be pointed out in the said valuation, it is not for the court to substitute its exchange ratio, especially when the same has been accepted without demur by the overwhelming majority of the shareholders of the two companies or to say that the shareholders in their collective wisdom should not have accepted the said exchange ratio on the ground that it will be determined to their interest.”
Therefore share exchange ratio fixed by experts who are certified professionals will not be disturbed unless the same is contrary to the provisions of law