TMI Blog1975 (4) TMI 137X X X X Extracts X X X X X X X X Extracts X X X X ..... d the meeting and whether the statutory majority were acting bona fide, and, thirdly, whether the scheme is such as a man of business would reasonably approve. Bearing in mind these principles, the scheme may be examined. 3. I might deal first with the legal objection raised on behalf of the Central Government. As stated earlier, the contention of the Central Government is that the scheme is of such a nature that it would affect the rights of the members and creditors, if any, of the transferee-company, as between themselves and the company, and that it would also involve a reorganisation of the share capital of the transferee-company. Under the circumstances, unless the transferee-company takes steps under section 391 and 394 of the Act in appropriate forum and obtains requisite approval and sanction for the scheme, it should not be sanctioned by this court. No such steps, the argument proceeded, are shown to have been taken and as such the petitions deserve to be dismissed in limine, for without such approval and sanction, the scheme would be wholly unworkable. Now, it is apparent that the scheme under consideration is one which might affect the rights of the members and/or cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... become effective, conditions abovementioned laid down in the scheme will have to be satisfied. The objection raised on behalf of the Central Government is, therefore, unsustainable. 4. It is true that when the registered officers of the transferor and transferee-companies happen to be situate in different places within the jurisdiction of two different High Courts, as in the present case, the compulsion of practical difficulties has necessitated the evolution of this somewhat ingenious formula. I cannot help observing, however, that the solution is far from happy and that in some cases the resultant situation might be embarrassing, especially in those cases in which, in the absence of a provision similar to that contained in clause 14 of the scheme herein, the court in invitum has to accord sanction to a scheme subject to its approval and sanction by another company and court. In such a case, the High Court which is first moved for according sanction to a scheme of amalgamation - and it would ordinarily be the High Court within whose jurisdiction the registered office of the transferor-company is situate-will, if it sanctions the scheme, make a judicial order which will be condi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e courts would be required to pass orders giving suitable directions and it is somewhat incongruous that provision be made for the same thing or matter by two different judicial orders passed by two different courts presumably on two different dates. Could the legislature have really envisaged a situation of this nature ? Even if both the amalgamating companies are required to initiate proceedings under sections 391 and 394, would it not be conducive to the achievement of the legislative object if the jurisdiction to sanction the scheme after following the prescribed procedure in relation to both the companies is exercised on a comprehensive view of the whole matter by one court alone ? Is it possible jot bring about this result by interpreting the word court occurring in sections 391 and 394 in a manner which requires departure from its definition contained in section 2(11) having regard to the subject and context ? Or is it a situation which can be remedied only by legislative intervention by way of amendment ? These are some of the most (sic) questions which suggest themselves to me. But I choose not to express any opinion on them in the present case and reserve liberty to con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtaking of the company to the Bank of Baroda by virtue of the provisions of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, the transferor-company has ceased to be a banking company. It does not carry on banking business in India and the licence dated October 14, 1952, granted to it by the Reserve Bank of India authorising it to carry on such business has also been cancelled. It has been further averred that under section 2 of the Banking Act, the provisions of the said Act were in addition to and not, save as therein expressly provided, in derogation of the Companies Act, and that, therefore, the provisions of the Banking Act were not applicable to the scheme of amalgamation in this case, especially because it did not pertain to amalgamation with any other banking company. Counsel for the transferor-company has not addressed any argument nor rendered any assistance at the hearing on this point and the said company has chosen to rest satisfied with the contention raised in the aforesaid affidavit which does not even deal with section 44B. Now, it is apparent that the contention based on section 2 of the Banking Act is wholly misconceived. Sections 44A an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and withdrawable by cheque, draft or the like. 7. It would not be out of place to mention that even according to the accepted legal concept of banking business, it must satisfy the same tests as are prescribed by the statutory definition contained in section 5(c). In Hart's Law of Banking, a banker or bank has been defined as a person or company carrying on business of receiving moneys and collecting drafts for customers subject to the obligation of honouring cheques drawn upon them from time to time by the customers to the extent of the amount available on their current accounts . Sir John Paget in his book on Banking has observed : No person or body corporate or otherwise can be a banker who does not, (i) take deposit accounts, (ii) take current accounts, (iii) issue and pay cheques, and (iv) collect cheques, crossed and uncrossed, for its customers. 8. Sheldon in his book on the Practice and Law of Banking states : A person cannot claim to be carrying on the business of banking unless he receives money or instruments representing money on current account, honour cheques drawn thereon and collects the proceeds of cheques which his customers place into his h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplied for and obtained a new licence and has not accepted deposits from the public. Indeed, a business organisation deprived of its right to carry on business under the existing licence, its assets and undertakings, its managerial and other staff, its premises, its goodwill, a substantial part of its trading name, even if it has a theoretical right to obtain a fresh licence and carry on banking business by virtue of its memorandum of association, would not in fact be able to do such business. For this reason presumably, the board of directors of the transferor-company took a decision that it was not in the interests of the members to start new business and they have invested the sale proceeds of the compensation bonds in short-term deposits and loans pending finalisation of the amalgamation scheme. A company which in circumstances aforesaid decides to amalgamate with another company and actively pursues such a cause leading ultimately to its dissolution in the near future cannot be said to be carrying on business. In the context, the mere fact that the transferor-company was incorporated to carry on banking business does not necessarily show that it is in fact carrying on that bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order or a scheme of arrangement from accepting fresh deposits. It does not appear that the licences of the banks in those cases were cancelled. Those banks were not deprived of their undertakings including assets and liabilities. In such cases it could hardly be said that merely because of some impediment having been placed in their banking business or money on account of the fact that they were being wound up, the said companies lost their basic character as a banking company. Such a company would still have accounts of the old depositors and merely because it has been prevented from accepting fresh deposits or has refrained from accepting fresh deposits or is winding up its business, it could not be said that its very existence as a banking company has come to an end. 14. It is also true that the word bank finds place in the name of the transferor-company and that under section 7 of the Banking Act no company, other than a banking company, can use as part of its name such a word. However, it cannot be overlooked that the name was chosen when the company was incorporated with a view to carrying on banking business. The situation has changed materially since then and now the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it might otherwise do unless it appears ex facie that the scheme was unfair, unreasonable or unworkable. My attention was invited to certain observations of this court in In re Manekchowk Ahmedabad Mfg. Co. Ltd., and it was submitted that in any case the scheme has not got to be scrutinised by the court with that much care with which an expert will scrutinise it nor will it approach it in a carping spirit with a view to pick holes in it. When the statutory majority has sanctioned the scheme acting bona fide, unless there are some strong and cogent grounds to show that it was conceived, designed or calculated to cause injury to others, the court will ordinarily sanction it. Now, I do not wish to throw the smallest doubt on this general proposition and, indeed, sitting singly it would not be open to me, and even otherwise, it would be presumptuous on my part, to question the wisdom of these words which are largely based on rules or principles laid down in a catena of judicial decisions. However, it is essential to remember that in the end what has to be decided in each case is a question of fact, namely, whether to accord sanction or not, and circumstances are so infinitely variou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with more than the statutory majority. Secondly a new class of shareholders has entered into the picture which has got to be reckoned with in view of its power and prestige. Financial institutions, statutory corporations and governments hold shares in certain joint stock companies and sometimes between themselves they acquire controlling interest. In the case of the transferor-company itself, we find that out of its 5,00,000 shares, eight corporate bodies hold 2,27,373 shares and two governments hold 36,339 shares. Their total shareholding comes to approximately 53% of the paid up capital of the company. Now, this class of shareholders being usually well informed scrutinises the scheme with an expert's eye and it is presumed to act bona fide and for the benefit of the company as a whole. However, the possibility cannot be ruled out that they might be in a position to gain more from the scheme than other members of the class by reason of their interests in some other capacity; for example, they might give up something in favour of the transfer-company since they also hold shares in the said company and their such interest may be sufficient to obtain for them a greater benefit in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expressed the same view in the following words : 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. 19. In J. S. Davar v. Shanker Vishnu Chandrachud J., speaking for the Division Bench, observed : 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 considerati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , English and Indian, have been considered. 22. In view of the foregoing discussion it appears to me that the court cannot abdicate its duty to scrutinise the scheme with vigilance and act as a mere rubber stamp simply because the statutory majority has approved it and there is no opposition to the scheme in the court. So much weight cannot be attached to the view of the statutory majority as to require the court to mechanically put its imprimatur on the scheme. The court is not bound to treat the scheme as a fait accompli and to accord sanction merely upon a casual look at it. It must still scrutinise the scheme to find out whether it is a reasonable arrangement which can be reasonable people conversant with the subject be regarded as beneficial to those who are likely to be affected by it. In the pursuit of such inquiry, the court is not tied down by any rigid principles or strait-jacket formulas and no enumeration contained in judicial decisions of the factors which can be taken into account, howsoever precise, can be treated as exhaustive so as to limit the scope of the inquiry which, having regard to varying circumstances, might differ from case to case. The burden lies on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which commended itself to them as being in the interests of the shareholders was to amalgamate it with some other concern of repute and with growth prospects. This decision based on their commercial judgment seems to be pre-eminently justifies even on practical considerations, for, the transferor-company has been deprived of every thing and all that it is now possessed of is liquid capital. The only other alternative could have been to wind up the company and to distribute its assets amongst members. The present scheme, however, provides a better choice since it offers an option to the members either to accept cash payment or to become members of the transferee-company. The transferee-company is a well-organised industrial unit manufacturing one of the basic raw materials required for diverse industries including defence oriented industries. It has reached its production target within about two years of the establishment of its factory and has now undertaken an ambitious expansion programme. Its record of sales, profits and development is reported to be satisfactory and its reserves and surpluses are fairly good. It has been paying dividend regularly on its equity capital since 197 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the market at ₹ 25 per share. There is no material on record to indicate as to what was the market value of the equity shares of the transferee-company on the date on which the scheme was approved by the boards of directors of both the companies. However, taking judicial notice of the state of the share market in the days preceding the temporary restriction on payments of dividends imposed by the recent regulations, it would not be unreasonable to proceed on the assumption that those shares must be quoting at the same, if not higher, rate. Proceeding on the basis that the stock exchange quotations offer a safe guide for valuation for the purpose of amalgamation, it would appear that for every ten shares of the transferor-company, the market value of which ranged between ₹ 1,300 to ₹ 1,350 at the material time, the transferee-company will issue ten equity shares in its capital having total market value of ₹ 250 and nineteen convertible and ten non-convertible debentures of the face value of ₹ 25 and ₹ 91.50, respectively, bearing interest at the minimum rate of 8 1/2% per annum. On the basis of their face value, the debentures could be valued at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e transferor-company. However, in determining the said amount, consideration was given to the fact that in the event of liquidation, the shareholders would have received approximately ₹ 137 per share after deduction of tax at source at the prevailing rate of 23% on the surplus over the face value of the shares of the transferor-company. Even this notional figure would have attracted additional Income Tax depending upon the income group to which an individual shareholder belonged. The cash option figure was, therefore, determined at an amount which was higher than the said figure and even higher than the prevailing market quotation of the shares of the transferor-company on the date on which the scheme was approved by the board of directors of the respective companies. Besides, on comparison with the other banking companies whose undertakings were taken over and which subsequently entered into a scheme of amalgamation with other running companies, the percentage of cash option provided in the scheme was more favourable. It worked out to nearly 87.73 per cent of the break-up value of the shares of the transferor-company. It has been further averred in the said affidavit that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt procedure might be ill-suited to some extent to the inquisitorial role of the court in the matter of valuation. It is pertinent to note, however, that in a somewhat analogous jurisdiction, namely, in dealing with reconstruction schemes, courts in foreign countries have devised suitable methods. As pointed out by Gower in his book on Principles of Modern Company Law, third edition, at page 645, the Scottish courts make a practice of referring such schemes to a reporter (generally he will be a chartered accountant or solicitor) whose report they consider before confirming the scheme. If, therefore, the existing practice and procedure are found to be inadequate to effectively deal with such problems, the court need not feel stifled. Under our law, its inherent powers to give such direction or pass such orders as may be necessary for the ends of justice and to prevent abuse of the process of the court are saved. This power is wide enough to enable the court to devise similar procedure, if need arises, in our country. New problems require new solutions and the court is not powerless to find such solutions. I do not, therefore, agree that the vote of the majority must necessarily oust ..... X X X X Extracts X X X X X X X X Extracts X X X X
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