TMI Blog1970 (9) TMI 70X X X X Extracts X X X X X X X X Extracts X X X X ..... in the order that detailed reasons which weighed with the court to accord its sanction to the scheme of compromise and arrangement 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 hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s were held, the Deputy Registrar in his capacity as chairman of the meetings filed his report on 24th December, 1969, 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 ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ioning or refusing to sanction the scheme. In fact very often these scheme petitions are usually ex parte in nature 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 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Central Government. For the present, I should like to refer to it as the scheme of compromise and arrangement and the 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 4 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mind very meekly and timidly submitted to the altered ratio with the result that the veto of Kohinoor has prevailed 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 ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be well settled. The court undoubtedly has a discretion whether to accord sanction to a scheme of compromise and 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 interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or to the interest of the creditors and shareholders of Navjivan or from a broader aspect of purity of administration of private sector 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 Pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l have to issue fresh shares. These shares will have to be allotted to the holders of ordinary shares of Navjivan and unsecured creditors of Navjivan 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 month ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lished that in respect of a part of the issue, Kohinoor will have to obtain permission of the Controller of Capital Issues under section 3 of the 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 u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company, in the case of a living or working company whose shares are quoted on the stock exchange, the price fluctuations would indicate commercial 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, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion had also arisen in the case of In re Manekchoek and Ahmedabad Manufacturing Co. Ltd. [1970] 40 Comp. Cas. 819 (Guj.) and the contention was disposed of in 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I of the Act would apply. Mr. Shah in no uncertain terms stated that Kohinoor is an undertaking to which section 20( a ) would apply. Section 20( a ) reads as under : "20. Undertakings 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of undertakings which are interconnected undertakings within the meaning of one or more of the foregoing sub-clauses of section 2( g ). In order to substantiate this contention, factual averments should have been made which 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Navjivan. In the penultimate paragraph of this statement which is to be found in a booklet at page 40, it has been stated that the Kohinoor Mills Ltd. which has sponsored the scheme is being managed by the managing agents, 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 the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nothing to show that some new link was established between the aforementioud six companies so as to make them interconnected undertakings either on 16th April, 1970, or on June 1,1970, when the Act came into force. In my opinion, therefore, the aforementioned 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the subscribed capital of such other body corporate: Provided that the aggregate of the investments so made by the board in all other bodies corporate shall not exceed thirty percent, of the subscribed capital of the investing company : Provided further 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ention of the legislature is clearly discernible from the language employed in the proviso to sub-section (2) and sub-section (4) of section 372 which indicate that the investment therein contemplated is investment of capital or funds of the investing company. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that Kohinoor is purchasing 40 shares of Navjivan for a price of Rs. 100. It can be said with certain amount of confidence that Kohinoor could have issued its own shares to some other persons and would have been entitled to recover Rs. 100 per share. If the allotment was to 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany into the funds of another company. That would be giving very wide meaning to the word "invest" as used in section 372. Prohibition enacted in section 372 has a wholesome purpose behind it. It is to put a restriction on the powers of a company to, utilise its surplus funds to buy 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 3 72, 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 81 are specifically carried out." These conditions are that the company should adopt a special resolution to the effect that the further shares will be allotted to the persons other than those mentioned in section 81(1). Such resolution should be passed in a genera] meeting of which 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 cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement covered by section 391 are of the widest character ranging from a simple composition or moratorium to an amalgamation of various companies with a complete reorganization of their shares and loan capital, The next question is: what do the words "compromise" and "arrangement" connote ? Pennington 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 preven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by making offer to the shareholders of the other company and completely ignoring the company buy over the shares and if they are in a position to buy or acquire nine-tenths of the total shares they can force the dissenting minority to compulsorily sell its shares to the purchaser. This result can be brought 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. " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... court that same shareholder to return to the company a part of what he had received from it in respect of his statutory obligations, such return being for a purpose which the company could quite conveniently achieve and if so ought assuredly to provide for out of its own corporate funds. Justice Younger further 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s almost identical though not as complicated as one in the aforementioned case, the very effect of the scheme if sanctioned being to make National Bank which had proposed the scheme wholly-owned subsidiary company of the Scottish bank. In the case before me, the scheme is between Navjivan and its shareholders and creditors, 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 prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of its fairness has first of all been submitted to the court. Under section 209, on the other hand, the matter may never come to the court at all. If it does come to the court, then the onus is cast on the dissenting minority to demonstrate the unfairness of the scheme. There are, therefore, good reasons for requiring 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 Companie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... limb of the submission under this head was that the scheme is in fact a scheme of amalgamation of the Navjivan with the Kohinoor and, therefore, the procedure prescribed under section 394 ought to have been carried out. This point may be disposed of briefly by merely saying that the scheme does not envisage amalgamation of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cessary to provide that a particular thing such as reduction of share capital cannot be brought about by way of a scheme of compromise and arrangement unless special procedure prescribed for the same in section 100 onwards is carried out, a specific provision such as rule 85 was enacted for the purpose. Section 206 of the Companies 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of capital and the requirements of the Act and these Rules in relation thereto shall be complied with, before the compromise or arrangement, so far as it relates to reduction of capital, is sanctioned. If section 391 were not to be treated as a complete code and if it is intended that various things that can be done by way of a scheme of 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 sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 100 onwards. The very fact that a specific rule had to be enacted for this purpose indicates that section 391 is a complete code providing for all those things which can be included in a scheme of compromise and arrangement and all those things can be brought about by the procedure prescribed in section 391 onwards. The nature of compromise 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the effect on those interests, of the compromise or arrangement, if, and in so far as, it is different from the effect on the like interests of other persons; and ( b )in every notice calling the meeting which is given by advertise ment, there shall be included either such a statement as aforesaid or a notification of the place at which and the manner 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 : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... far reaching effect of the scheme of compromise and arrangement on the status of the Navjivan. Therefore, the first condition of section 393(1)( a ), in my opinion, is fully satisfied. The next condition is that the statement must contain the material interests 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 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 bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpromise and arrangement offered to the managing director and directors as shareholders is entirely identical with the compromise and arrangement offered to other shareholders of Navjivan. The effect of the scheme of compromise and arrangement on the interests of directors and managing director as shareholders and creditors will be entirely the same as the effect on the interests of other shareholders 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 bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an it has strictly complied with the requirements of law. But beyond that, in my opinion, no question of motive in such a case is relevant and no abuse of process of law can even be conceived in the circumstances of the case. But, as a second limb of the argument, it was urged that this very petition, which the court is considering for sanctioning the scheme, could not have been filed by Kohinoor and 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... between the company and its creditors or members. Mr. Shah however urged that that is a preliminary stage where it would be open to the company to come and oppose the scheme if the company does not approve the scheme. Mr. Shah urged that for this very reason rule 68 was enacted so as to enable the company to come to the court and contest the petition at the preliminary stage. If Mr. Shah is right in his submission, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out who can move the court to consider a scheme of compromise and arrangement. Sub-section (1) in no uncertain terms provides that an application can be made by the company or a creditor of the company or a member of the company or, in the case of winding up, by the liquidator. Now, it is not possible to accede to the submission of Mr. Nanavati that the court can proceed suo motu to sanction the scheme by merely 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 pers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... law cannot restrict or narrow down the scope of the section. If there would be a conflict between a section and rule or between the statute and a rule enacted under it, obviously the statute must prevail over the rule. But I would presently point out that there is no conflict between rule 79 and section 391. In paragraph (1) of rule 79 undoubtedly it is provided that the company or the liquidator can file the substantive 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... extraordinary general meeting of the Kohinoor to consider the scheme of compromise and arrangement was attended by 76 shareholders in person and 98 by proxy having total shareholding of 6,691 shares. 39,632 shares are held by Killick group and their nominees attended the meeting. The Life Insurance Corporation a Government of India undertaking holds 14,941 shares of Kohinoor and the Unit Trust of India another Government 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 utte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ke representation which the court must take into consideration before passing any order under section 391(2). It so happened that the notice issued by this court was served on 7th April, 1970, upon the Regional Director of Company Law Board to whom powers under section 394A are delegated. Mr. J.C. Gatha, Registrar of Companies, appeared before the court on 30th April, 1970, when the petition was set down for hearing. 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 assista ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the scheme was concerned. It was final and binding unless revised, set aside or modified by the appellate court. Therefore, I am not prepared to accept the submission of Mr. Shah that the order dated 30th April, 1970, was interlocutory; However, that is neither here nor there as I have examined every submission of Mr. Shah on merits and found no merit in any of them. That takes me to the last contention of Mr. Shah. It 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 investi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ementioned case of In re Manekchowk and Ahmdabad Mfg. Co. Ltd. [1970] 40 Comp. Cas. 819 (Guj). Finally, one submission of Mr. Shah may be noticed.' However, I really fail to see how Mr. Shah could have ever raised that contention. It was urged that in the statement annexed to the petition it has been stated that investigation was being made by the Central Government under sections 235 to 251 and Kohinoor had at no stage disclosed 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 391(1) and after the meetings were convened and the scheme was approved under section 391(2). At no stage a dispute has been raised before me, now that the scheme has been very meticulously examined by the officer of the Central Government that even by a remote chance any provision of the statute was not complied with. The next question is whether the class was fairly represented. I should like to point out that because of the radical change 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 dep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he matter went back to Kohinoor the ratio was altered from 26:1 not to 30:1 which was the initial proposition but to 40: 1 and this evaluation of assets and liabilities of Navjivan was made by the shareholders of Kohinoor. The matter had to go back to Navjivan and on a direction of this court, a fresh meeting of the shareholders of Navjivan was convened. At this meeting nearly 90 per cent, of the total shares were represented and unanimously 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as to ameliorate the living condition of a section of the society who primarily need help and succour in the form of employment. When examining the scheme of compromise and arrangement which aims at re-starting of closed industrial undertaking this is also, in my opinion, a relevant consideration. If those who oppose the scheme emphasising the rights of creditors of an insolvent company to obtain an order for winding up ex debito justiliae and 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the holders of ordinary shares. (4)There will be similar change of substituting "ten months" for "six months" in the clauses concerning the unsecured creditors, depositors and holders of loan account. (5)Similar change shall be made in the scheme so far as it relates to unsecured creditors, suppliers of cotton, stores, colours, chemicals, etc. (6)In the scheme so far as it affects the dues of the Regional Provident Fund Commissioner and Employees' 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 O ..... 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