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TMI Blog1970 (9) TMI 70X X X X Extracts X X X X X X X X Extracts X X X X ..... rrangement will be given after taking into consideration the representation that the Central Government may choose to make under section 394A of the Companies Act. Subsequently, the Central Government submitted its first representation dated 28th May, 1970 (at page 159 of the record) and the second representation dated 31st August, 1970 (at page 313 of the record). After these representations : were filed on behalf of the Central Government, the present petition was set down for hearing. After hearing Mr. L. T. Shah for the Central Government, I now proceed to consider the. various objections raised by the Central Government to my according sanction to the scheme of compromise and arrangement and also detailed reasons why the court has accorded its sanction to the said scheme of compromise and arrangement. Navjivan Mills Company Ltd. (hereinafter referred to as "Navjivan") was incorporated as a private limited company under the Companies Act, 1913, having its registered office at Kalol, District Mehsana, in this State. It was a composite textile undertaking having spinning machinery, weaving machinery and full fledged processing house. When Navjivan commenced business its paid up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 69, which disclosed that the proposed scheme with certain modifications was approved by different classes of creditors and members of the Navjivan by more than the statutory majority. Kohinoor thereafter obtained leave of the court in Company Application No. 38 of 1970 on April 8, 1970, under rule 79 of the Companies (Court) Rules, enabling it to file a substantive petition under section 391(2) for obtaining sanction to the scheme of compromise and arrangement as a pproved by the members and creditors of Navjivan. As the scheme envisaged issue of equity shares of the Kohinoor to the members and creditors of Navjivan, it was necessary that issue of fresh shares to persons other than the equity shareholders of Kohinoor should be approved by the shareholders of Kohinoor by a special resolution as envisaged by section 81 (1A) of the Companies Act. Accordingly, Kohinoor convened an extraordinary general meeting of its members on 20th April, 1970, for passing a special resolution. The scheme of compromise and arrangement as proposed by Kohinoor between Navjivan on the one hand and its creditors and members on the other and the allotment of shares of Kohinoor to the shareholders of Navjiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and therefore any assistance coming from an independent source in examining merits and demerits of the scheme would always be welcome. But, on the other hand, the court had to weigh the mounting liability of the sponsors of the scheme and the more important fact that the adjournment would necessitate more than six weeks of delay. Faced with this situation, the court, after examining the case minutely and in its various aspects, proceeded to sanction the scheme on that day giving liberty to the Central Government to make its representation and making a reservation in the order that if any further directions are necessary after considering the representation of the Central Government that it might desire to make, the court would give further directions, undoubtedly for the proper working and implementation of the scheme. It was least expected and there was not even the slightest apprehension that the Central Government would come out with a contentious attitude. Whatever that may be, the nature and effect of the order made by this court is itself in serious dispute and I would not dilate upon this aspect at this stage. Suffice it to say that on 30th April, 1970, this scheme was sanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scheme is between all classes of creditors and all classes of members of the Navjivan on one the hand and Navjivan on the other sponsored by Kohinoor. Initially, the compromise offered to the holders of 4½ per cent, redeemable cumulative preference shares of Navjivan was that in exchange of 12 preference shares of Navjivan, the Kohinoor will allot one equity share of the Kohinoor and arrangement for working out fractional shares was also drawn up. A provision was also made for the transfer of shares by appointing constituted attorneys to work on behalf of Kohinoor. Subsequently, this proposal was modified at the meeting of preference shareholders to the effect that instead of 12 preference shares being exchanged for one equity share of Kohinoor the ratio would be 10: 1. In other words, the scheme finally approved by the holders of the preference shares of Navjivan was that in exchange for 10 preference shares of Navjivan, the holder would be entitled to one equity share of Kohinoor and the system of working out fraction was retained. Initially the compromise offered to the holders of ordinary shares of Navjivan was that in exchange for 20 ordinary shares of Navjivan, the hol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iled unchallenged. The final scheme in this behalf now submitted to the court for sanction is that in exchange for 40 ordinary shares of Navjivan, the holder would be entitled to one equity share of the Kohinoor. Initially the compromise offered to the unsecured creditors who were depositors and holders of loan accounts was that the claim of the depositors and the holders of loan account shall stand reduced to 31% of the amount standing to their credit together with the interest accrued thereon up to 23rd August, 1968, and the reduced claim shall stand assigned to the Kohinoor and that Kohinoor in consideration thereof shall allot to the said depositors and holders of loan accounts the equity shares of Kohinoor, each of Rs. 100 fully paid at a premium of Rs. 200. When this proposal was moved at the meeting of the unsecured creditors who were depositors and holders of loan accounts, an amendment was moved that the premium, instead of being Rs. 200 shall be Rs. 160, and this was approved and was also accepted by the petitioner. However, some marginal adjustments had to be made again to persuade the Life Insurance Corporation and Unit Trust of India and other equity shareholders of Ko ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d arrangement or not and in exercising its discretion one way or the other, the court should like to examine the scheme from certain definite standpoints. The court will normally need to be satisfied of three matters: (i)that the statutory provisions have been fully complied with; (ii)that the class or classes must have been fairly represented ; and (iii)that the arrangement must be such as a man of business would reasonably approve. Buckley on the Companies Acts, 13th edition, page 409, has in this connection observed as under: "In exercising its powers of sanction the court will see, first, 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 an intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonably approve. The court does not sit merely to see that the majority are acting bona fide and thereupon to regist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r and commercial morality and also to find out whether by sanctioning such a scheme the wealth and power flowing from wealth would be concentrated in the hands of few to the detriment of many. All these aspects will be examined while initially analysing the contentions raised by Mr. L. T. Shah, learned counsel who appeared on behalf of the Central Government. I would, therefore, now examine the contentions canvassed by Mr. Shah at the resumed hearing of this petition. Mr. Shah formulated the following propositions for my consideration : (1)The proposed scheme envisages issue of fresh capital which cannot be done in the absence of prior permission of the Controller of Capital Issues as provided by the Capital Issues (Control) Act, 1947, and it being an inte gral and inseverable part of a comprehensive scheme of compromise and arrangement, it would be futile to sanction the scheme as the same could be rendered nugatory and infructuous if the permission is not granted or with held. (2)On the introduction of the Monopolies and Restrictive Trade Practices Act, 1969, the proposed scheme of compromise and arrangement at the instance of Kohinoor Mills Company Ltd., cannot be given effec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivan in the proportion adumberated in the scheme. These shares will have to be issued by Kohinoor from its unissued capital. Therefore, it cannot be gainsaid that the scheme envisages issue of fresh capital by Kohinoor and this cannot be done in view of the provisions contained in section 3 of the Capital Issues (Control) Act, 1947, without the consent of the Central Government. Section 6 of the Act confers powers on the Central Government for granting exemption from all or any of the provisions of sections 3, 4 and 5 of the Act. Armed with these powers, the Central Government has issued the Capital Issues (Exemption) Order, 1969, dated 1st February, 1969. Clause 4 of the Capital Issues (Exemption) Order, 1969, provides that the issue of securities by a public limited company and all transactions relating to such securities issued by any such company, if the value of the consideration involved in such issue together with the value of the consideration involved in any previous issue of securities made by such company within the twelve months immediately preceding such issue, does not exceed twenty five lakhs of rupees, the issue would be exempt from the operation of the Act. This av ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Capital Issues (Control) Act, 1947. It is common ground that such a permission is not sought and obtained. Mr. L. T. Shah urged that the whole scheme is based on the postulate that permission of the Controller would be forthcoming and if the permis sion is not granted the scheme would be knocked out from the bottom. It was urged that the court should not undertake examination of the scheme depending upon such nebulous state of affairs or on the whim and fancy of the Controller of Capital Issues who can set at naught the scheme by refusing the permission. Sanctioning of such a scheme which for its very existence and implementation depends upon the absolute discretion of an officer, would be, it was urged, an exercise in futility. It must be confessed that the issue of shares by Kohinoor is an integral and inseverable part of the scheme and in fact, in my opinion, it is a pivot round which the entire scheme revolves. The ordinary and preference shares of Navjivan have to be exchanged for the equity shares of Kohinoor. The claim of the unsecured creditors of Navjivan are to be satisfied by issue of equity shares of Kohinoor. The whole scheme, therefore, hangs in balance on the quest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judgment of the community above the value of the share which would ordinarily be respected. , This, in my opinion, is the correct approach. Pennington in his Company Law, second edition, at page 59, has stated as under : "If the transferor or transferee company's shares have a stock exchange quotation, dealing prices over a period shortly before the transferee company's offer was announced will usually be taken as the measure of their value." (vide In re Press Caps Ltd. [1949] Ch. 434; [1949] 1 All. ER 1013 ; 19 Comp. Cas. 327 (CA)). It appears that when the sponsors of the scheme initially proposed that equity shares of Kohinoor will be issued to the unsecured creditors of Navjivan at a premium of Rs. 200 a question was raised whether the premium is on the higher side and after taking into consideration the prevailing market price on the exchange, premium of Rs. 160 was agreed upon. The premium appears to have been fixed by reference to ruling price of the equity shares of Kohinoor on the stock exchange at the relevant time, which in ordinary circumstances would be a good measure of its price. I was also told yesterday afternoon that at present the ruling market price of the eq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same manner by a judgment delivered by me on 10th December, 1969. Nothing exceptional was pointed out to me which would persuade me to take a different view of the matter. I may also incidentally mention that necessary permission in the case of New Commercial Mills Co. Ltd. was obtained after the scheme was sanctioned. In sanctioning the scheme at this stage without permission, there is neither any contravention of any provision of law or any rule or even on the ground of propriety, I see nothing improper in doing it because unless a tendentious attitude is disclosed permission of this nature can always be reasonably expected to be granted. Second contention of Mr. Shah was that on the introduction of the Monopolies and Restrictive Trade Practices Act, 1969, the proposed scheme of compromise and arrangement at the instance of Kohinoor Mills Co. Ltd. cannot be given effect to as Kohinoor is an undertaking to which Part A of Chapter III of the Act applies. The Monopolies and Restrictive Trade Practices Act, 1969, came into force with effect from 1st June, 1970. It is a revolutionary measure and was almost long overdue. Part IV of our Constitution lays down the "Directive princip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndertakings to which this Part applies.-This Part shall apply to - (a)an undertaking if the total value of- (i)its own assets, or (ii)its own assets together with the assets of its interconnected undertakings, is not less than twenty crores of rupees." In order to attract the application of section 20(a) it must be shown that Kohinoor is an undertaking the total value of whose assets is not less than 20 crores of rupees or is an undertaking the total value of whose own assets together with the assets of its interconnected undertaking is not less than twenty crores of rupees. If it was shown by cogent, convincing and reliable evidence that Kohinoor is an undertaking whose own assets are more than twenty crores of rupees or there are certain interconnected undertakings with Kohinoor and the total value of their assets exceed twenty crores of rupees then the scheme could not have been sanctioned without obtaining the approval of the Central Government as required by section 23 of this Act. But in order to attract the application of the Act as stated earlier, certain factual averments were absolutely necessary. Firstly, it should have been shown to the court that Kohinoor is an und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich would have unmistakably shown that some other undertaking is under the same management as is Kohinoor or that the owners and controllers of Kohinoor are also the owners or controllers of the other undertaking or that through the chain of other undertakings they are interconnected. This allegation was not put forth when the first affidavit was filed on behalf of the Central Government because at that time the Act itself was not on the statute book. In paragraph 6 of the second affidavit filed by Shri Trimbak Jagannath Gonchalekar, Regional Director, Company Law Board, Bombay, the averment in this connection is as under : "The Kohinoor Mills Co. Ltd. is an undertaking to which the provisions of the Monopolies and Restrictive Trade Practices Act, 1969, applies. The petitioner is, therefore, not entitled to proceed with the implementation of the scheme without the necessary sanction, etc., under the said Act." This is all the averment in this behalf. In fact it was very candidly stated that factual averments in support of the allegations are not made in the affidavit. Nowhere in the affidavit either in express terms or in implied manner it was suggested bow Kohinoor is an underta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Killick Industries Ltd., Bombay. The Killick Industries Ltd. are also the managing agents of various other companies, some of them being : 1.Ahmedabad Electricity Co. Ltd. 2.Surat Electricity Co. Ltd. 3.Bombay Suburban Electricity Co. Ltd. 4.Thana Electricity Co. Ltd. 5.Shivrajpur Syndicate Ltd. 6.C. P. Railway Ltd. Relying on this statement, Mr. Shah urged that if Killick Industries Ltd., a public limited company, was the managing agents of the aforementioned six companies, all the six companies would be under the same management and, therefore, section 2(g)( iii)(c) and section 2(g)(vi ) would be attracted as all these concerns are under the same management and would be interconnected undertakings of the Kohinoor Mills Ltd. If the position in law as it stood on the date on which the statement under section 393(1) was issued had continued to remain unaltered till to-day, Mr. Shah's contention would have become unanswerable. But again there is a radical change in law of which notice must be taken. By the Companies (Amendment) Act, 1969, section 324A was added to the Companies Act, 1956. It reads as under : "324A. Abolition of managing agencies and secretaries and treasurers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orementioned six or any one or more of the companies could not be said to be interconnected undertakings with Kohinoor. Now, if Kohinoor is not shown to be an undertaking-the total value of whose assets exceed twenty crores of rupees-and if it is also not shown that there were some other interconnected undertakings along with Kohinoor whose total assets exceed twenty crores of rupees, obviously section 20(a) of the Monopolies and Restrictive Trade Practices Act, 1969, would not apply to the Kohinoor and if it does not apply to the Kohinoor, then even if by sanctioning the scheme Navjivan is being made a wholly owned subsidiary company of the Kohinoor, its total assets would still not exceed Rs. 20 crores and, therefore, by sanctioning the scheme, no provision of the Monopolies and Restrictive Trade Practices Act, 1969, would be contravened and the Act would not stand in the way of the court sanctioning the scheme. The second contention of Mr. Shah, therefore, cannot be accepted. The third contention of Mr. Shah was that the petitioner having not complied with the requirements contained in sections 372, 395, 391 to 394 and 393(1) of the Companies Act, 1956, it being a condition pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er that the aggregate of the investments made in all other bodies corporate in the same group shall not exceed twenty per cent, of the subscribed capital of the investing company." It was urged that the scheme shorn of all its embellishments is an attempt at circumventing the provisions contained' in section 372(1). In other words, it was contended that if all the relevant aspects of the scheme are considered together in terms, Kohinoor purchases all the shares both ordinary and preference of the Navjivan and this is being done in violation or contravention of the statutory limit and prohibition contained in subsection (2). Section 372 prohibits a company from subscribing or purchasing by itself or through other modes the shares of another body corporate except to the extent and except in accordance with the restrictions and conditions specified in the other sub-sections of section 372. Sub-section (2) provides that the company which purchases shares and which would hereinafter be referred to as investing company would not be entitled to invest in shares of any other body corporate more than 10 per cent, of the subscribed capital of such other body corporate. The first proviso to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny. As a second string to the bow, it was urged that section 81 and its various sub-sections have enacted all the restrictions on the issue of fresh capital and the court should not read any further restriction on the issue of fresh capital any-whereoutside section 81. For the purpose of section 372, the company purchasing or subscribing to the shares of the other company is to be designated an investing company. The question would be whether where a fresh capital is issued by the company could the company be said to be investing its funds by issue of fresh capital ? When the shares are issued against cash, the share capital is the liability of the company. Investment would be out of the assets of the company. When could one be said to be investing funds ? In Stroud's Judicial Dictionary, third edition, page 1507, the second meaning of "invest" is set out as under : " 'Invest' in the investment clause in a will means, inter alia, to apply money in the purchase of some property from which interest or profit is expected, and which property is purchased in order to be held for the sake of the income which it will yield." Investment implies purchase of property in which money has bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other than the shareholders of Navjivan, Kohinoor would have raised capital which it could have used in purchasing the shares of Navjivan. Instead of going through this circuitous procedure, Kohinoor is exchanging its own shares for the shares of Navjivan in a certain ratio. If the transaction is viewed from this angle, the transaction is certainly one of purchase of shares. Mr. Shah urged that whether the transaction is one of purchase of shares must be examined from this angle only. He referred to the definition of the word "goods" in section 2(7) of the Sale of Goods Act, 1930. The word "goods" is defined to mean " every kind of moveable property other than actionable claims and money; and includes stocks and shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale." He also referred to the opinion in Reference by Board of Revenue, North Western Provinces [1881] ILR 3 All. 788, 793 [FB], wherein an observation was made as to what "money" legally meant, that is, what is included in the word and it seemed to be thought that in law "money" only meant coin in gold, silver, or copper. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y over the other company and it also has a second laudable object, namely, prohibition to the effect that more than 10 per cent, of the subscribed capital of the company whose shares are sought to be purchased cannot be purchased by the investing company, so as to bring about a merger or amalgamation without going through the procedure as contemplated by section 371 onwards. .Section 372, therefore, operates in a different field and in different circumstances. If, therefore, the shares of a certain company are being taken over by another company by way of scheme of compromise and arrangement, certainly, this scheme of compromise and arrangement cannot be made subservient to the provisions contained in section 3 72, The generality of provisions contained in section 391 cannot be restricted in its operation by reading therein the restriction placed on the bar of purchasing of shares under section 372. Section 372 would be confined to such a transaction where the shares are purchased by the investing company as and by way of investment out of its funds, consideration being money or money's worth. Where by way of a scheme of compromise and arrangement the shares of one company are exch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch notice should be given in the manner provided therein, The members of the Kohinoor have adopted such a special resolution. Therefore, the condition prescribed in section 81(1A)(a) has been satisfactorily complied with and, therefore, further issue of shares to the persons other than those mentioned in section 81(1) would be legal and valid. Now, unless section 372 is read' as a proviso to section 81, the bar created in Section 81 would not come into play for the issue of further shares. There is no warrant for reading section 372 as a proviso to section 81 nor is there any warrant for reading section 81 as a proviso to section 372. Therefore, viewed from either angle, the issue of further shares under the terms and conditions set out in the scheme would not contravene section 372 and, therefore, the first limb of the argument cannot be accepted. As a second limb of the argument, Mr. Shah contended that the proposed scheme in terms is not a scheme of compromise and arrangement but it is a take-over bid and would be a scheme or contract as envisaged by section 395 of the Companies Act and unless the petitioners have strictly complied with the provisions contained in section 395, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gton on Company Law has observed as under ; "A compromise has been described as an agreement terminating a dispute between parties as to the rights of one or both of them, or modifying the undoubted rights of a party which he has difficulty in enforcing. An arrangement, as the expression is used in the Companies Act, 1948, embraces a far wider class of agreement, and it need be in no way analogous to a compromise, so that it will include agreements which modify rights about which there is no dispute, and which can be enforced without difficulty." If such is the wide meaning of the word "arrangement", the fact that the scheme of compromise and arrangement for transfer of control of a company by acquisition of all its shares can be effected by an offer to acquire shares coupled with the power to compel dissenting shareholders to transfer their shares under section 395 it does not prevent the court from approving the scheme under section 391. Amalgamation or merger or take-over may be brought about in various ways. In fact there are different provisions in the Companies Act by which the same result can be achieved. A scheme of arrangement may also enable the company to acquire share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ought about by sidetracking the first company. The contention, however, is whether such a thing can at all be said to be a scheme of compromise and arrangement between the company and its shareholders and creditors. In other words, Mr. Shah specifically contended that where by a scheme of compromise so called attempt is made to take over one public limited company by another public limited company, it can never be said to be a scheme of compromise and arrangement between the company and its shareholders and members. There is no compromise between the company and its shareholders and it was urged that this can hardly be said to be an arrangement. The word "arrangement" may not be so narrowly construed. The word "arrangement" is such that where even there is no dispute, arrangement can be brought in. "Compromise" postulates existence of a dispute and giving and taking on either side. "Arrangement", on the other hand, is something by which parties agree to do a certain thing notwithstanding the fact that there was no dispute between the parties. If such is the wide connotation of the word "arrangement" as used in section 391, obviously, the arrangement by which shares of one company a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her felt that there is attached to the section throughout its history the idea of some difficulty to be resolved by a compromise or arrangement of rights on one side or the other-a situation which prior to the enactment of the section only necessitated winding up of the company. He was, therefore, not inclined to extend section 120 to cover up a scheme of arrangement which compelled a shareholder to part with his own shares in return for shares of some other company. He rejected the scheme on the ground that the scheme itself could not be said to be either compromise or a disputed claim or an arrangement between shareholders of Guardian and the Guardian. In the opinion of Younger J., the word "arrangement" was applicable only where there was some controversy or some difficulty. The matter was carried in appeal and Lord Cozens-Hardy M. R. did not accept the interpretation of the word "arrangement" made by Younger J. Negativing the contention that the shareholders of Reliance would be getting two shares of Guardian and the shareholders of Guardian would be receiving one share of Reliance, could not be said to be an arrangement between the shareholders of Guardian and Guardian, it was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ditors, sponsored by Kohinoor and the scheme if sanctioned would have the effect of making Navjivan a wholly-owned subsidiary company of the Kohinoor. The question in terms raised is: can such a thing be said to be a scheme of arrangement between Navjivan and its creditors and shareholders ? and, secondly, whether it can be sanctioned under section 391 ? Second question raised by Mr. Shah will also stand answered by this decision that such a scheme would be covered by section 395 and the procedure contemplated therein should have been carried out. When the scheme in the National Bank case was being considered in the Chancery Division, a contention was in terms raised that the scheme was not one under section 206 (section 391 of our Companies Act) but one under section 209 (section 395 of our Companies Act). Both the contentions are answered in favour of the company proposing the scheme. Such a scheme can be said to be a scheme of arrangement between the company whose shares are being taken over and its creditors and shareholders and that such a scheme can be sanctioned under section 391 and it is not obligatory to carry out the procedure prescribed under section 395. The scheme has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a smaller majority in favour of a scheme under section 206 than the majority which is required under section 209 if the minority is to be expropriated." It would thus appear that even if the scheme of compromise and arrangement in essence involves acquisition by one company of the whole of the share capital of another company notwithstanding the fact that 90 per cent, of the shareholders do not agree as envisaged by section 395, the same can still be sanctioned under section 391 and it is no answer to the problem that such a scheme can only be considered under section 395. At this stage, one submission of Mr. Shah may be noticed. It was urged that section 209 of the English Companies Act differs in one respect from section 395 of our Companies Act inasmuch as there is no provision analogous to sub-section (4A) of section 395 in section 209 of the English Companies Act. That hardly makes any difference. Sub-section (4A) was introduced to protect the interests of the shareholders. If, therefore, anyone takes resort to section 395, he is bound to carry out the procedure prescribed under sub-section (4A). If the scheme is in terms a scheme under section 391, it could not be rejected ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Navjivan with the Kohinoor. The effect of the scheme as and when implemented would be that Navjivan would be a wholly-owned subsidiary company of Kohinoor. It will still retain its own independent identity with this difference that all its shares will be owned by Kohinoor. This is not amalgamation of two companies in the sense in which the word is understood in section 394. It is, therefore, not necessary to carry out the particular procedure prescribed under section 394 before the scheme is sanctioned. Before parting with this point, I should like to consider one more submission of Mr. I. M. Nanavati that section 391 is a complete code by itself while considering the scheme of compromise and arrangement. It was urged that once it is shown that the scheme submitted for the sanction of the court would be one which would be covered by section 391 and is not shown to be ultra vires, then unless a specific provision is made which necessitates carrying out the specified procedure prescribed in other provisions of the Act, the same can be brought about by way of a scheme of compromise and arrangement. As an illustration, it was urged that the scheme of compromise and arrangement may inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpanies Act, 1948 (United Kingdom), is in pari mater.ia with section 391 and sub-section (6) thereof which is in pari materia with section 390(b) provides that that expression "arrangement" used in that section includes reorganization of share capital of the company by consolidation of shares of different class or by division of shares into shares of different class. In interpreting section 206 (6) in the case of In re Cooper, Cooper and Johnson [1902] WN 199, it was observed that when the arrangement involves a reduction of capital the requirements of the Act with regard to such reduction of capital must also be complied with. This aspect has been recognised in rule 85 of the Companies (Court) Rules and specific provision to that effect would inculcate that but for the specific provision, the entire reorganization of share capital excluding reduction of share capital could have been brought about by way of a scheme of compromise and arrangement. The question whether section 391 is a complete code in itself except where other provisions to the contrary are made was exhaustively dealt with by me in the case of In re Manekchowk and Ahmedabad Manufacturing Co. Ltd. [1970] 40 Comp. Cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... compromise and arrangement, if they were to fall under different provisions of the Companies Act which prescribe certain procedure for doing the same and that procedure has to be gone through, it was not necessary to provide specifically that if the scheme of compromise and arrangement includes reduction of capital special procedure in respect of reduction of capital must be gone through before it could be sanctioned as part of the scheme of compromise and arrangement. There seems to be good reason for making such a provision in rule 85. A scheme of compromise and arrangement may be between company and creditors or between the company and members. It the proposed scheme offers compromise or arrangement between the company and its members only and it envisages reduction of share capital which can be carried out as part of the scheme under section 391 without going through the procedure prescribed under section 100 onwards, it may be that reduction of share capital in a given case may adversely affect the creditors and the creditors would have no chance to object to the same. It is manifestly clear that reduction of share capital in certain circumstances may adversely affect the cre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e that can be entered into under section 391 is not defined. The definition of reorganization of capital is an inclusive definition which would not exclude reduction of share capital or increase of share capital which would also be a kind of reorganization of the share capital of a company. If section 391 was subject to other provisions of the Act every time the scheme of compromise and arrangement is put forth for the sanction of the court, if it includes things for which specific provisions are made and that will have to be gone through before the scheme is sanctioned, it would result in unnecessary duplication of procedure and would be cumbersome. On the contrary, it appears that if the creditors and members of the company arrive at a certain compromise which the court considers fair, it can be sanctioned under section 391 despite the fact that for some of those things included in the compromise another procedure is prescribed in the Companies Act and which has not been carried out. It, therefore, appears that section 391 is a complete code which provides for sanctioning of the scheme of compromise and arrangement. If such a scheme of compromise and arrangement includes increase ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ner in which creditors or members entitled to attend the meeting may obtain copies of such a statement as aforesaid." The court, while giving directions in Company Application No. 136 of 1969 filed under section 391(1) of the Companies Act seeking directions for convening meetings of creditors and members and if thought fit to approve with or without modifications the proposed scheme of compromise and arrangement, has by the said order dated 29th October, 1969, given direction that the advocate for the petitioner-company, i.e., Kohinoor, shall within three days from the date of the order file in the court the form of advertisement, the notice and the statement accompanying the notice and the same shall be settled by the Registrar of the court. The statement so required in order to conform with section 393 must set out therein : (i)the terms of the compromise and arrangement and its effect ; (ii)the material interest of the directors, managing director, managing agent, secretaries and treasurers or manager of the company whether in their capacity as such or as members or creditors of the company or otherwise ; and (iii)the effect on those interests of the compromise and arrangem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in their capacity as such or as members or creditors of the company or otherwise At the relevant time when the scheme was proposed and notice convening the meeting was sent there was no managing agent of the Navjivan. So in order to conform with the second condition of section 393(1) the material interests of directors and managing director alone were required to be stated. It is stated in the statement that the present directors of the company are inter-rested in the proposed scheme of compromise and arrangement to the extent of their shareholdings and deposits in the company. In the earlier part of the statement it is mentioned that the present deposits of the managing director and their relations in the company are to the tune of Rs. 22.68 lakhs. Therefore, their interest in the company and the scheme has been set out. Mr. Shah seriously contended that the third condition of section 393(1) that the effect of the scheme on the interest or material interest of the directors or managing director has not been specifically set out in the statement. Section 393(1)(a) does not require that the statement should contain the effect of the compromise and arrangement on the material interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reholders and creditors. If the effect is not different it was absolutely not necessary to comply with the latter portion of section 393(1)(a). The latter portion does not come into play unless the condition governing its application exists. The very condition does not exist in this case. In my opinion, therefore, the statement under section 393(1)(a) annexed to the notice convening the meetings fully conform with the requirements of section 393(1)(a) and, therefore, the submission of Mr. Shah that the statement as required by section 393(1)(a) was not sent and, therefore, the scheme cannot be sanctioned cannot be accepted. The next contention is that Kohinoor purchased 10 ordinary shares of the Navjivan only a few days prior to the sponsoring of the scheme and that this must have been done conveniently for the purpose of enabling the Kohinoor as a member of the Navjivan to sponsor and propose the scheme. Mr. Shah urged that this is an abuse of process of law and the court should not sanction the scheme of compromise and arrangement at the instance of such a petitioner who has not come with clean hands. Frankly speaking, this argument beats me completely. I do not see that there i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therein lies the abuse of process of law. It was urged that under rule 79 of the Companies (Court) Rules, unless a substantive petition under section 391(2) is filed by the company or its liquidator as the case may be within seven days of the filing of the report by the chairman, the same can be filed with the leave of the court by the creditor or contributory as the case may be. It was urged that as the substantive petition is not filed by the company, i.e., Navjivan, and as there was no liquidator because it was not ordered to be wound up, the petition could have been filed only by the creditor and there would be no contributory because there was ho order for winding up and Kohinoor is neither a company meaning thereby the Navjivan nor is it creditor and, therefore, the present petition filed by Kohinoor cannot be entertained by the court. It was urged that before the company is wound up the shareholder is a member and once the company is ordered to be wound up the nomenclature changes and shareholder in winding up becomes a contributory. It was, therefore, contended that wherever the word "contributory" is used either in the Act or in the Rules, it postulates the existence of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmission, it would mean that the moment the company appears where petition is filed by someone other than the company and the company contests the petition, the court cannot proceed further. If Mr. Shah is further right in his submission that no scheme can be imposed upon an unwilling company, the moment the company showed its unwillingness to any proposed scheme, the court becomes powerless and has to stay its hands. I must say that there is no warrant for this construction of section 391(1). Rule 68 appears to have been enacted for a limited purpose of apprising the company that a scheme of compromise and arrangement is proposed as between itself and its creditors and/or members. The company having its independent juristic personality, independent of its members, where a member puts forth a scheme which in the ultimate analysis would bind the company, it is just and fair that the company must be informed of such a proposal. But giving up of the information does not tantamount to granting of veto to the company so as to repudiate the scheme by its very dissent. The court is not powerless to consider and, if satisfied, to sanction the scheme even in the teeth of opposition by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erely perusing the report of the chairman without a petition because section 391(2) does not envisage any substantive petition being filed. I would on the contrary proceed on the assumption that a petition is necessary and must be filed. Section $91 must be read as a whole notwithstanding the fact that it provides for different and distinct stages through which a scheme must be processed. In section 391(1) the legislature specifically provided that the court must be moved by an application and proceeded to set out persons competent to approach the court. Once a scheme is proposed and the court is invited to process it by an application made by a person competent to make it, it is inconceivable that at the subsequent stage of processing the scheme under subsection (2), that person becomes incompetent to invite the court to proceed further. Sub-section (2) does not in terms state in contradistinction to sub-section (1) which specifically provides making of an application and the persons competent to make it. It is, therefore, proper to assume that once the court's jurisdiction is invoked under subsection (1) by a person competent to do so the legislature by not making a contrary or d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubstantive petition under section 391(2) failing which the creditor or contributory can file the petition. The word "contributory" is defined in section 428 to mean every person liable to contribute to the assets of a company in the event of its being wound up, and includes the holder of any shares which are fully paid up. The persons liable to contribute to the assets of the company are those set out in section 426(1) which includes every present and past member subject to the qualifications set out therein. In given circumstances, even a past member would be a contributory. In paragraph 3 of rule 79 the word used is "contributory", it appears that even a past member was given a right to move a substantive petition under section 391(2). The submission of Mr. Shah that the word "contributory" in paragraph 3 of rule 79 postulates the stage where the company is being wound up does not carry conviction. If any restricted meaning is given to the word "contributory", as urged by Mr. Shah, it would mean that where there is a scheme of compromise and arrangement between the company and its members which has been approved by a statutory majority and the company is unwilling to file the pet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnment of India undertaking-holds 1,132 shares of the Kohinbor, Both the Life Insurance Corporation and the Unit Trust of India after very minutely examining the scheme have assented to the scheme. One has to examine the veto which the Life Insurance Corporation and the Unit Trust of India exercised over the management of Kohinoor. It is necessary to recall at this stage that at the meeting of the ordinary shareholders of Navjivan a resolution was adopted that in exchange of 26 shares of Navjivan one equity share of Kohinoor should be allotted. It was this proposal which was to be considered by the equity shareholers of Kohinoor. The Life Insurance Corporation and Unit Trust of India stood back and refused to budge an inch till the ratio was altered apparently to the utter disavantage of the shareholders of Navjivan, namely, 40:1. But, as stated earlier, they were unfortunately no choosers and were at the sweet will and mercy of Kohinoor and, therefore, submitted to the same. In the light of this fact, I have to examine the submission of Mr. Shah that in this scheme, Kohinoor has not cared to look after the interests of small shareholders of Kohinoor. What is stated above is eloque ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mr. Gatha requested the court on behalf of the Regional Director of Company Law Board to adjourn the petition so as to enable the Central Government to make its representation. The motion for adjournment rested on the ground that the Central Government had not time enough to apply its mind to the scheme. Undoubtedly, this work is being done by the Regional Director at Bombay and he had about 13 days' time at his disposal and prima jade there was no merit in the motion for the adjournment. However, I have had always an apprehension about ex parte schemes and as no creditor or member had appeared to contest the petition, I believed that the representation of the Central Government would assist me in examining the scheme on its own merits and that too with the assistance of an independent body who would examine the scheme in its various aspects and that too objectively. On the other hand, Mr. Nanavati strongly urged that if the scheme is sanctioned, the petitioner is prepared to restart the mills which would necessarily provide employment to a large body of unemployed workers to whom any adjournment would result in prolonged starvation. That was equally a weighty consideration. I, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was urged that the petitioner has not satisfied the requirements contained in the proviso to section 391(2) by not making necessary disclosures and it being a condition precedent to the court exercising jurisdiction under section 391(2) the present petition must fail. The proviso to sub-section (2) of section 391 provides 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 the material facts relating to the company, such as the latest financial position of the company, the latest auditors' report on the accounts of the company, pendency of any investigation proceedings in relation to the company under sections 235 to 251, and the like. For the reasons given by me in my judgment in In re Mankchowk and Ahmedabad Manufacturing Co. Ltd. [1970] 40 Comp. Cas. 819 (Guj.), I would hold that, as the proviso is cast in a negative form, it is mandatory and making of the disclosures as required by the proviso being condition precedent to the court exercising jurisdiction for sanct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as to what happened to that investigation. I need not refer in detail to sections 235 to 251. They confer power upon the Central Government to make investigation into the affairs of the company. I will assume that such an investigation was made. Who would be in the know as to what happened to that investigation?. The contention is raised by none other than the Central Government that the Kohinoor did not disclose as to what happened to the investigation conducted by the Government of India into the affairs of Navjivan. It does not lie in the mouth of the Central Government in whose possession the report, if any, would be to contend that Kohinoor has not disclosed the outcome of the investigation. The report as and when prepared would be submitted to the Central Government. The Central Government should be the last person to contend that the other side has not disclosed the report and when I asked Mr. Shah as to what happened to that investigation, again, I waited for an answer in vain. If such be the position, no importance can be attached to the contention that Kohinoor did not disclose as to what was the outcome of the investigation. It was not even clear whether there was any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nge made by Kohinoor in the ratio of ordinary shares, the meeting of the ordinary shareholders of Navjivan had to be called twice. At the first meeting of the ordinary shareholders, out of a total 45,000 equity shares, 41,710 shares were represented and the holders of the same voted in favour of the scheme. At the second meeting of ordinary shareholders, out of 45,000 shares, 40,132 shares were represented and the altered ratio was also unanimously voted upon, the reasons for which are not far to seek and . to which I would presently advert. At the meeting of preference shareholders, out of the total of 7,000 preference shares, 4,144 shares were represented and the scheme was approved unanimously. At the meeting of unsecured creditors who were depositors and holders of loan accounts, out of a total debt under this head of Rs. 25,72,374, creditors, the value of whose deposits was Rs. 24,92,280 attended and unanimously approved the scheme. At the meeting of unsecured creditors who were suppliers of stores, etc., out of the total value of debt of Rs. 29,75,556 affirmative voting represented debt worth Rs. 18,18,370 and the negative voting represented the debt in the value of Rs. 1,22, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly voted in favour of this modification. If there is a choice as I would presently point out such as the workers have to choose between starvation and meagre employment the same was the position of shareholders of Navjivan. I must also remember that, much though 1 may detest this imposition by the Kohinoor shareholders on the Navjivan shareholders leaving them little choice and freedom for manoeuvre, ultimately, the shareholders of Navjivan are the sound judges of their own interest and the support that they have extended to the scheme would indisputably indicate that they are people who have properly considered the whole thing and possibly reached a conclusion which represents their best judgment. Presumably, they must have honestly acted. There is no allegation of coercing the minority. There was not even a single dissenting vote. Therefore, despite my intense feeling that Kohinoor has almost dictated its terms to Navjivan I would accept the scheme as reasonable and fair one. At any rate, this narration by itself would effectively repel the contention of the Central Government that the interest of Kohinoor is jeopardised in the scheme. That, in my opinion, is begging the issue. B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d insist that the company shall be wound up meaning thereby that it should reach its civil death, throwing workers out of their employment by putting an end to the existence of the company and if, on the other hand, by the sacrifices made on all sides such as by shareholders, creditors and such as even by the workers, an industrial undertaking can be rejuvenated, resuscitated or re-started it should be a serious endeavour of the court to help in the process within the provisions of law and by harmonising and reconciling varied and variegated interests having conflicting claims against the company. When a big industrial unit is closed down, one would stand aghast apart from the shocking chain of reactions in the personal life of individuals connected with the undertaking and in the civic and economic life of the society. This Navjivan, I am told, has its mills at a small place like Kalol, a taluka town in Mehsana district, and at the hearing of this petition I was told that it has a population of 40,000. 1,700 workers are employed in this mills. If the mills re-start, the unemployment problem in a small town could be considerably solved. The dependants at the rate of a family of fou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oyees' State Insurance Corporation, the words " after the expiry of the period provided for filing the appeal and in case no appeal is filed after sanction of the scheme by the highest court" shall be added after the words in clause (d) so far as it relates to the Regional Provident Fund Commissioner and clause (a) so far as it affects the Employees' State Insurance Corporation. (7)The arrangement with the Labour Union Majur Mahajan Sangh, Kalol, dated 14th December, 1969, shall form part of the scheme subject to this modification that the date of re-starting shall be as per the directions in this order. (8)Clause VIII of the scheme shall read as under : "The petitioner shall re-start Navjivan Mills on and with effect from 10th October, 1970, and statement shall be made to the court that this condition has been fully complied with on 12th October, 1970." There is one apprehension of Mr. I. M. Nanavati in respect of which some clarification ought to be made. It is apprehended that now when the Central Government has appeared and filed its representation it may be that the Central Government may prefer appeal against the order of this court. In that event, it would be very diffic ..... X X X X Extracts X X X X X X X X Extracts X X X X
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