9911796707
TMI Blog1994 (11) TMI 358X X X X Extracts X X X X X X X X Extracts X X X X ..... work spinning and weaving mills, cotton mills, jute mills and mills of any other description. The Authorised Share Capital of the petitioner-company is Rs. 1,00,00,00,000 (Rupees one hundred crores only) divided into 30,05,500 equity shares of Rs. 100 each and 69,94,500 unclassified shares of Rs. 100 each. The Subscribed Share Capital of the petitioner-company as on 31st March, 1993 is Rs. 26.30 crores (Rupees twenty-six crores thirty lakhs only) divided into 26,90,000 Equity shares of Rs. 100 each. The paid-up capital of the petitioner-company as on 31st March, 1993 is as under : Rs. in lakhs 13,45,000 Equity shares of Rs. 100 each fully paid up. 1345.00 13,45,000 Equity shares of Rs. 100 each on which Rs. 50 paid up. Rs. 672.50 Less: Allotment Money/Calls in arrears Rs. 16.51 655.99 Rs. 2.000.99 Subsequent to 31st March, 1993,3,091 Equity Shares were forfeited due to non-payment of allotment money. The paid-up capital of the petitioner-company as on 31st December, 1993 is Rs. 26,70,72,075 (Rupees twenty-six crores seventy lakhs seventy-two thousand seve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed rates. The Transferor Company entered into a Memorandum of Understanding (MOU) dated 28th May, 1993 with the financial institutions and banks regarding the guarantees furnished by the transferor- company to the financial institutions and banks for the Rehabilitation Package loans advanced to MEIL. In terms of the said MOU, in a full and final settlement of the amounts due by the petitioner-company to the said financial institutions and banks, under the aforesaid guarantees, the transferor-company was required to issue and allot 2,46,000 Ordinary Shares of Rs. 100 each on 1st October, 1993 and 1,77,120 ordinary Shares of Rs. 100 each on 1st October, 1994 to the various financial institutions and banks, who are the beneficiaries under the aforesaid guarantees, aggregating to 4,23,120 Ordinary Shares of Rs. 100 each reckoned at a price of Rs. 300 per Ordinary Share, for the purposes of discharge of the transferor company's guarantee obligations. Accordingly, the transferor- company has already allotted 2,46,000 Ordinary Shares of Rs. 100 each at a premium of Rs. 200 per share to the financial institutions and banks on 1st October, 1993 out of the said 4,23,120 Ordinary Shares to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... complementary to the other and a stable profitability will be achieved. 7. The Directors of the petitioner-company MIL and transferor-company MFL approved the proposal for amalgamation of the MFL with MIL and pursuant to the respective Resolutions passed by them, the detailed Scheme of amalgamation was finalised. The Directors of both the companies were of the opinion that such Amalgamation was in the interest of both the companies. The detailed reference to salient provisions of the Scheme of Amalgamation need be made at this stage. Salient provisions of the Scheme of Amalgamation : 1. The undertakings and all the properties, rights, claims and powers of the Mafatlal Fine Spg. & Mfg. Co. Ltd. (hereinafter called "MF") be without further act or deed transferred to and made to vest in Mafatlal Industries Ltd. (hereinafter called "MIL") with effect from 1st day of April, 1993 pursuant to the provisions of sections 391 to 394 of the Companies Act, 1956 together with all the estates and interests of MF therein but subject nevertheless to the charges, if any, affecting the same. 2. All the liabilities, duties and obligations of MF be also without further act or deed transferred to M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... afatlal should act as Chairman of the Meeting and should report the result thereof to this Court. The details of the order shall be mentioned at appropriate stage as a serious objection is taken to the convening and holding of the meeting of the Equity Shareholders of the MIL without classifying the equity shareholders into majority group and minority group and second objection is to the effect that Arvind N. Mafatlal, who acted as Chairman of the meeting, ought not to have been appointed and he ought not to have worked as Chairman of the said meeting. 9. It is admitted fact that pursuant to the direction contained in the order of this Court dated 22-12-1993, notice of the meeting was sent individually to the members of the MIL by post, under certificate of posting at their respective registered addresses together with a copy of the said Scheme of Amalgamation and of the Statement required under section 393 of the said Act and a Form of Proxy. The notice of the said meeting was also advertised in the issues of Times of India, Ahmedabad and Bombay Edition dated 29th December, 1993 and in Gujarat Samachar dated 29th December, 1993. 10. On 22nd January, 1994, meeting of the members ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by this court for as many as 9 objections which in his own words are as under : Objection No. (i) : The Scheme is not for the avowed purpose of objects for which it is proposed. Objection No. (ii) : Consequently, as the Scheme is not for the purpose for which it is proclaimed to be, I submit it is for an ulterior motive which is explained hereinafter in details. Objection No. (iii) : That the Scheme even otherwise is not in the interest of Mafatlal Industries Limited. Objection No. (iv) : Miheer H. Mafatlal, in his personal capacity and as karta of his HUF and as trustee of Trusts and his family members are the shareholders of MIL holding 5% of the total share capital of MIL. He, therefore, claims that he and his family members are of a distinct class of shareholders having interest in the petitioner-company MIL of a distinct nature in view of the family arrangement dated 1st March, 1979 and, therefore, they were required to be treated as a separate distinct class of share- holders and their separate meeting was required to be called for approving the proposed Scheme as the Scheme vitally affects the rights of this class of shareholders. In the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , this Honourable Court ought not to grant sanction to the Scheme of Amalgamation. 14. In support of the aforesaid Nine Objections raised by Miheer H. Mafatlal, in the reply affidavit, he has produced voluminous documents to which reference shall be made at the appropriate stage while dealing with the specific objection. It may be stated that reply affidavit is sworn on 9th March, 1994 at Bombay and is accompanied by Annexure-A to Annexure-R from pages 100 to 582. 15. It is also required to be noted that the Company Secretary of the petitioner-company - Ramakant R. Patel has filed affidavit-in-rejoinder and in support thereof some annexures are produced. Miheer H. Mafatlal has filed thereafter, after the commencement of the hearing of this petition, affidavit-in-sur-rejoinder and along with such affidavit-in-sur- rejoinder, once again large number of documents are produced from Annexure-I to Annexure-VII commencing from page 717 to page 756. The petitioner-company MIL has filed affidavit-in-sur-rejoinder during the course of hearing of Ramakant R. Patel. From the aforesaid pleadings and the documentary evidence produced in support thereof, this Court is called upon to decide the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hagubhai and their families would respectively have an equal interest in companies or in partnership firms. At the time of the death of the said Bhagubhai, the said Hemant was just 9 years of age. The business of Mafatlal Group was therefore for all practical purposes managed by the said Navinchandra. At the time of the death of Navinchandra the shareholding of the branch of Hemant Mafatlal in Mafatlal Group of Industries was equal to aggregate shareholding of Arvind Mafatlal, Yogindra Mafatlal and Rasesh Mafatlal. On the death of Navinchandra, the Mafatlal Group was managed by Arvind Mafatlal, Yogindra Mafatlal, Rasesh Mafatlal and late Hemant Mafatlal. Arvind Mafatlal was, however, the eldest male member in the family who was always looked at by Yogindra, Rasesh and late Hemant as an elder in the family and respected. 18. On 16th August, 1971, Hemant Mafatlal died at the young age of 36 years leaving behind him his widowed mother, his wife, his son Miheer (then aged 13) and his two daughters (then aged 11 and 6). At that time, the Mafatlal Family, i.e., the families of Navinchandra and Bhagubhai were running 3 Apex Companies (1) Mafatlal Gagalbhai & Company Private Limited, (2) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Group, family of Arvind Mafatlal known as ANM Group, family of Yogindra Mafatlal known as YNM Group and family of Rasesh Mafatlal known as RNM Group. It is his further case that Mr. C.C. Chokshi was requested to prepare a Scheme for division of family business concerns. According to him, Mr. C.C. Chokshi, prepared a Note dated 23rd of February, 1979 making six suggestions for the division of Mafatlal Group of Industries into four groups as there were four family groups. Said note is produced at Annexure-E to the reply affidavit by Miheer. It is his further case that suggestion No. V put forth by Mr. C.C. Chokshi with minor modifications was accepted in the meeting held on 1st of March, 1979 at which following were present: (1) Arvind Mafatlal, (2) Yogindra Mafatlal, (3) Rasesh Mafatlal, (4) Miheer Mafatlal, (5) Padmanabh Mafatlal and (6) Hrishikesh Mafatlal. The minutes of the said meeting dated 1st of March, 1979 are produced at Annexure-F to the reply affidavit by Miheer and entire suggestion No. V is reproduced by him in his affidavit-in-reply. As per suggestion No. V, Group-A which included Mafatlal Industries Limited (MIL) was to go to Miheer, i.e., MHM Group, as the holding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t it would also be in his best interest to be with the seniormost member Arvind Mafatlal. It is his further case that his grandmother and mother and he himself as young child had implicit faith in Arvind Mafatlal as he was looking after the affairs of his family since the premature death of his father. It is his case that Arvind Mafatlal also assured that at a later date he would separate Group-A Companies and would manage the companies in Group-A till Miheer formally established himself in the management thereof. Even Mr. C.C. Chokshi, who was the Advisor to the family also assured Miheer, his mother and grandmother that the division which was made was fair and would be worked out by Arvind Mafatlal in the best interest of Miheer's family. 23. It is his further case that as a part of the Scheme of arrangement, the two subsidiary companies Mahamaya Investment Limited and Sandeep Holdings Limited were floated. The first company was to be ultimately and is presently held by YNM Group. Because of his young age and his managerial inexperience, the third subsidiary company was not floated. The non-floating of the third subsidiary company and failure to hive out the Group-B company into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court of Bombay has already sanctioned the Scheme based on the fact that the scheme is overwhelmingly passed by statutorily required majority of shareholders. The very Scheme of Amalgamation is seriously challenged before this Court by one of the directors of MF and one group of equity Shareholders of MF as well as MIL. This Court, being the Court in whose jurisdiction transferee-company is registered, is therefore, required to decide such Company Petition. One High Court of co ordinate jurisdiction having already sanctioned the Scheme, this Court is called upon not to sanction the Scheme so as to reach findings inconsistent with those reached by the Bombay High Court. It is this anomaly which is required to be answered. Anomaly Noted 25. The proposed Scheme of Amalgamation inter alia stipulates that M.F. and MIL shall proceed with reasonable dispatch to make necessary applications in the respective High Courts for sanctioning the Scheme of Amalgamation and for the purpose of obtaining an order or orders under section 394 of the Companies Act, 1956 for carrying into effect the Scheme of Amalgamation. It is further stipulated that transfer of pro- perties of M.F. to MIL shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d for appropriate order under section 391 and section 394 of the said Act for its sanction and approval to the Scheme of Amalgamation, with or without modification, is very succinctly brought out by P.D. Desai, J. (as His Lordship then was) in the case of Bank of Baroda Ltd. v. Mahindra Ugine Steel Co. Ltd. [1976] 46 Comp. Cas. 227 (Guj.) in the following words : "It is true that when the registered offices of the transferor and transferee-companies happen to be situate in different places within the jurisdiction of two different High Courts, as in the present case, the compulsion of practical difficulties has necessitated the evolution of this somewhat ingenious formula. I cannot help observing, however, that the solution is far from happy and that in some cases the resultant situation might be embarrassing, especially in those cases in which in the absence of a provision similar to that contained in clause 14 of the scheme herein, the court in invitum has to accord sanction to a scheme subject to its approval and sanction by another company and court. In such a case, the High Court which is first moved for according sanction to a scheme of amalgamation - and it would ordinarily ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ruled out. There is also one more angle from which the question requires to be examined. In respect of some of the matters contemplated by sub-section (1) of section 394, both the courts would be required to pass orders giving suitable directions and it is somewhat incongruous that provision be made for the same thing or matter by two different judicial orders passed by two different courts presumably on two different dates. Could the Legislature have really envisaged a situation of this nature ? Even if both the amalgamating companies are required to initiate proceedings under sections 391 and 394, would it not be conducive to the achievement of the legislative object if the jurisdiction to sanction the scheme after following the prescribed procedure in relation to both the companies is exercised on a comprehensive vie w of the whole matter by one court alone? Is it possible to bring about this result by interpreting the word 'court' occurring in sections 391 and 394 in a manner which requires departure from its definition contained in section 2( 11) having regard to the subject and context? Or is it a situation which can be remedied only by legislative intervention by way of amen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y his conduct, he permitted the Bombay High Court to sanction this very Scheme of Amalgamation. He thereby not only waived his objections but also invited an anomalous situation to be created whereby, in case of acceptance of any of his objections, this Court would be required to reach conclusion inconsistent with that of Bombay High Court. When Mr. M. J. Thakore, learned counsel for Miheer, was confronted with this question, he submitted that there was no justifiable explanation for Miheer not filing his objection to proposed Scheme of Amalgamation in proceeding initiated by MF (transferor-company) before Bombay High Court. He, however, submit- ted that the proposed Scheme of Amalgamation is more prejudicial and injurious to the interest of shareholders of MIL and, therefore, Miheer has chosen to file objections before this High Court. This, in my opinion, is a very poor excuse to explain the conduct of Miheer. This Court, however, would not throw away objections of Miheer on the ground of his conduct or on the principle of waiver only but would proceed to consider his objections on merits. It has become once again imperative for this Court to bring to the notice of the Parliament ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it becomes binding on all the creditors and the members and also on the company including the dissenting members and the creditors. Proviso to sub-section (2) of section 391 imposes very important statutory obligation on the person or company moving an application under section 391(1) to disclose to the Court by affidavit or otherwise all the material facts relating to the company. Non-disclosure of relevant facts may result into misleading the court or suppressing from the court vital and material facts having bearing on the matter and may prove to be fatal so as to justify the court to refuse sanction/approval to the scheme. Section 394 (which is corresponding section 208 of English Act), inter alia, provides that the scheme of amalgamation or compromise or arrangement or order of the court sanctioning such compromise or amalgamation may provide for all or any of the following matters : (i)the transfer to the transferee-company of the whole or any part of the undertaking, property or liabilities of any transferor-company; (ii)the allotment or appropriation by the transferee-company of any shares, debentures, policies, or other like interests in that company which, under the com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hose who attended the meeting and that the statutory majority are acting bona fide and are not coercing the minority in order to promote interest 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. 32. The court does not sit merely to see that the majority are acting bona fide and thereupon to register the decision of the meeting, but at the same time, the court will be slow to differ from the meeting, unless either the class has not been properly consulted, or the meeting has not considered the matter with a view to the interest of the class which it is empowered to bind, or some blot is found in the Scheme." 32. The main principles as to what should be the correct approach of the Court in a petition under section 394 of the Companies Act, 1956 are no longer in dispute and are stated and re-stated in different languages by different courts. The first question is to ascertain whether the statutory requirements as laid down in section 391 have been complied with. The requirements of section 391 are th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity or where the majority wants to usurp total power so as to exclude the minority, the minority is bound to suffer or to be tyrannised by sheer strength of numbers. It is, therefore, that the Legislature has provided that where a meeting has taken a certain decision, the court must apply its mind and consider whether it is in the interest of the company as a whole and of the class of persons for whom the majority acts and whether the scheme is such that it must be pushed through. Therefore, the correct approach on the second question is to determine that the court is neither called upon merely to register a decision of the majority nor is it called upon to act in such a manner that the minority will create a stalemate and thereby retard the progress which the majority has legitimately and reasonably a right to expect and make. Similarly, it must also see that the majority does not act in a manner adverse and prejudicial to the interest of minority with a view to suppress or oppress or coerce the minority. It is for the latter reason that D.A. Desai, J. (as His Lordship then was) in Manekchowk & Ahmedabad Mfg. Co. Ltd., In re [1970] 40 Comp. Cas. 89 (Guj.) observed that the court i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not too rigidly applied. The proposition to accord sanction to a scheme simply because thumping majority has approved it would, in the opinion of the court, tantamount to abdication of statutory function and duty imposed on the court and a breach of faith reposed in it by that class of small shareholders who for obvious reasons cannot and do not participate in the meeting or in the proceedings before the court and also by the dissident members who look upon the court to protect their interests even if they are not present before it having regard to the costs and inconvenience involved. In this connection court proceeded to make the following observations: "... That apart, there are other equally good and weighty reasons why such an approach is not justified. In the first place, in the modern times, the industrial Government in which a middle class investor has a vital stake as a shareholder, has become a complex structure. It is a hard reality that its leadership is sometimer vested in the hands of a few businessmen occupying strategic positions of great power. These business leaders often promote schemes of amalgamation which may appear at first sight to be sensible, prudent, nay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the court to make provision for those who dissent from the scheme. In our country, therefore, the role which the courts have to play now is more vital and potent; it is not only an inquisitorial and supervisory role but also a pragmatic role which requires the forming of an independent and informed judgment as regards the feasibility or proper working of the scheme and making suitable modifications in the scheme and issuing appropriate directions with that end in view. Lastly, the court must also take into account the interest of the employees and ensure that they are not adversely affected by the scheme and that adequate provision is made for them...." (p. 241) 35. After quoting opinion of Bowen L.J. and Fry LJ. in re Alabama, New, Orleans, Texas & Pacific Junction Rly. Co. (supra ) and those of Chandrachud, J. (as his Lordship then was) in re J.S. Davar v. Shanker Vishnu [1967] 37 Comp. Cas. 546 (sic) P.D. Desai, J. made the following pertinent observations: "In view of the foregoing discussion it appears to me that the court cannot abdicate its duty to scrutinise the scheme with vigilance and act as a mere rubber stamp simply because the statutory majority has approved it and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me has got necessarily to be looked at from the point of view of a prudent commercial man vide Sidhpur Mills Co. Ltd., In re AIR 1962 Guj. 305. 37. The scheme should not be scrutinised in the way a carping critic, a hair-splitting expert, a meticulous accountant or fastidious counsel would do it, each trying to find out from his professional point of view what loopholes are present in the scheme, what technical mistakes have been committed, what accounting errors have crept in or what legal rights of one or other side have or have not been protected. It must be tested from the point of view of an ordinary reasonable shareholder acting in a business like manner taking within his comprehension and bearing in mind the circumstances prevailing at the time when the meeting was called upon to consider the scheme in question. 38. In Alabama, New Orleans Texas & Pacific Junction Railway Co. 's case (supra), the detailed statement about the approach of the Court to a scheme of amalgamation is to be found. Lindley, LJ. made following pertinent observations: "... What the court has to do is to see, first of all that the provisions of that statute have been complied with; and, secondly, tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould 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." (p. 278) 41. The Madras High Court in Coimbatore Cotton Mills Ltd., In re [1980] 50 Comp. Cas. 623 while sanctioning the scheme under sections 391 and 394 of the Act held that the court should normally be satisfied in respect of the following four matters: "(i)The court should be satisfied that the resolutions are passed by the statutory majority in value and in number in accordance with section 391(2) of the Companies Act at a meeting or meetings duly convened and held. This factor is jurisdictional in the matter of confirmation of the scheme. The court should not usurp the right of the members or creditors to decide whether they approve the scheme or not. Therefore, if a class whose interests are affected by a scheme does not assent to the scheme or approve it at a meeting convened in accordance with the provisions of section 391, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h as where the scheme of compromise and arrangement also includes within its ambit reduction in share capital in respect of which special procedure provided in the Act and rules has not been carried out. Third known fetter on the Court's power is that the Court would not ordinarily sanction a scheme which includes something which can ordinarily be effected by resort to other provisions of the Companies Act. Within the limitation set out above, the Court will allow the companies the greatest freedom in devising schemes to suit their requirements and will approve those schemes if they are fair to all whose interests are affected. 43. I shall now proceed to set out, discuss and deal with the aforesaid 9 objections, firstly by setting out the factual background for each objection, secondly by examining the pleading of the parties and thirdly by deciding both factually as well as legally, in the context of relevant precedents, as to whether each objection is sustainable or not. Objection Nos. 1 & 2 44. It is the case of Miheer that the proposed Scheme of Amalgamation is not for the avowed purposes or objects for which it is proposed. The avowed objects or purposes for which the Schem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ced hereinabove. He submits that there is another hidden, covert or concealed object behind the Scheme and to achieve such object, the Scheme is proposed. In other words, the Scheme is proposed for some ulterior motive, namely, that of defeating the rights flowing in favour of MHM Group from family arrangement arrived at in 1979 and rendering infructuous the counter claim filed by Miheer in Civil Suit No. 1010 of 1987. Put bluntly, Arvind N. Mafatlal with his towering personality intends to devour and usurp fully the industrial and business interest which had otherwise fallen to the share of MHM Group and in this connection Miheer has described seven steps allegedly taken by Arvind N. Mafatlal both to deprive Miheer and his branch of their legitimate share and to oust him or exclude him from business systematically in a well organised manner step by step, so as to strengthen his financial power and to denude Miheer and the members of his family of all their powers by rendering them to a very hopeless minority. By describing the seven steps gradually and systematically taken by Arvind N. Mafatlal in the course of time, Miheer has tried to demonstrate before the Court that the cumula ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... more efficient and economic control in the running operations and would lead to economy in the administrative management and finally would improve profitability. 5. The proposed amalgamation would result into creating strong and large reserve funds, and the combined technological, managerial and financial resources would enhance the capability of the amal- gamated company to invest in larger and sophisticated projects to ensure rapid growth. 48. In his objections, Miheer has dealt with the aforesaid objectives in seriatim and has tried to demonstrate that really none of the avowed objectives would be or is likely to be achieved. 49. First objective Turning to the objective, he has pointed out that there is little scope for synergy of operations as two companies do not have the same line of business. MIL (transferee-company) has main activities in Textile and Chemicals, Electronic Component Divisions and its fundamental activity. As against the activity of MIL, activities of Mafatlal Fine (M.F.) are confined to Textile and Chemicals and the chemicals which M.F. manufacture are totally different from those being manufactured by MIL. It is because of these diversity in activity an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, particularly for rationalisation of product-mix. As against two textile units at the disposal of MIL, there would be five textile units after amalgamation which would give tremendous flexibility for product-mix rationalisation in the textiles sector alone. Textile business having turnover contribution of over 75 per cent in the total turnover of both the companies, it is most prominent business of both the companies and common operation of five textile units would greatly benefit the amalgamated companies. It is pointed out that amongst all the five mills of the two companies, the total number of products go beyond 3000. Textiles being the non-continuous batch-wise manufacturing process, there are large quantities of in-process inventories at each of the stage of production. Larger the number of products, larger is the inventory. It is pointed out that textile business consist of one of the largest number of products like shirting, sheeting, mulls, voiles, sarees, checks, cotton coating, suitings of P/V and P/ W, Blends, Lawns, Cambrics, etc., and within each product group, there are innumerable individual distinct products which required different count of yarn, different weave ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f operations can be said to have been achieved and if in other aspects where synergy of operations was lacking and is ultimately achieved by proposed amalgamation, it cannot be said that the said objective is not going to be achieved by the proposed amalgamation. It shall have to be kept in mind that textile activity is the common activity of the two companies. It goes without saying that ordinarily amalgamation of two companies, whose activities are same, may help in bringing about synergy of operations. Ultimately, the question is of commercial merit of the proposed Scheme. From the aforesaid details of the nature of activities of the two companies in textile division, it is difficult for the Court to hold that the first objective would never be achieved by the proposed Scheme of Amalgamation. It is also not possible for this Court to hold on this court that the Scheme is not for the avowed object of bringing about synergy of operations. In fact, M/s C.C. Chokshi & Co. has in its report extensively dwelt upon the common factors of the two companies which would justify the proposal for amalgamation. When there is common platform, namely, that of existence of substantial common bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unds. There is, therefore, no possibility of bringing about flexibility in capital gearing, submits Miheer. Miheer has very seriously questioned, in this connection, the decision to unload the shares of G.G.C.L. with a view to repay the loan taken for purchasing the shares of NOCIL from SHELL. He has pointed out that investment in G.G.C.L. was yielding a very high return of investment. By disposing of such shares, yield to MIL is reduced. On the other hand, shares of NOCIL from SHELL were purchased at Rs. 950 per share, for which purpose huge amount was required to be borrowed from Peerless Finance Limited, HDFC Limited, Mahindra & Mahindra Limited, etc. 54. The defence against the aforesaid objection is that a larger company will have a better flexibility in tapping financial resources and in the changed new economic scenario and globalisation of the economy will create more confidence in the persons dealing with the company. It is pointed out that dilution of investment in G.G.C.L. and acquisition of shares in NOCIL sold by SHELL has no relevance to the Scheme. It is pointed out that NOCIL was jointly promoted by MIL and SHELL Group. MIL held about 13.58 per cent of shares while ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being larger would generate more confidence in the investors and in the persons dealing with the company. It is pointed out by Miheer that the Scheme is not likely to generate any better confidence amongst the investors or shareholders firstly because the Right Issue of the year 1987 of MIL was substantially undersubscribed. This would show that the shareholders lacked requisite confidence and were not ready to subscribe even in Right Issue. He has pointed out that none of the employees or very few of the employees have applied for Right Issue of 1987 as well as of 1992. He has also pointed out that the Right Issue of 1992 was just subscribed and did not receive overwhelming support from the shareholders. He has further pointed out that this was the position of shareholders of MIL prior to amalgamation. It is his submission that after amalgamation, firstly looking to the poor performance of M.F., secondly, lower Earning Per Share of M.F. which would result into reducing per share earning of MIL and, thirdly, in view of the huge liabilities of M.F. which shall have now to be borne by MIL, in fact, the confidence of Shareholders and investors would not be boosted or increased, but it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bted the assertions made in the Explanatory Statement. I do not attach importance to the fact that Miheer has by renouncing Right Issues in 1992 made huge profit of over Rs. 2 crores because it is the case of Miheer that he was coerced to renounce his shares in view of his inability to subscribe to the same as large number of his shares and shares of his family were lying under the control of Arvind N. Mafatlal and Arvind N. Mafatlal is claiming that they are pledged to Mafatlal Gagalbhai since long as securities for loan advanced by the said firm to Miheer's family. However, the fact that by renouncing Right Shares of 1992, Miheer and the members of his family have made profit cannot be denied. It would therefore, be safe to assume that shares of MIL are being sold at reasonably high price and that shareholders have not lost their confidence in the working of the company. It cannot, therefore, be said that this objective is false or misleading or is not the real objective which would be achieved by amalgamation. Here also, it is required to be noted that more than requisite majority of shareholders have voted in favour of the Scheme. Had the scheme been so discouraging or against ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said statement would show that in the case of MIL, the relative component of cloth purchased and sold is higher than the corresponding ratio in the case of M.F. This would be one factor leading to a lower percentage of raw material cost to sales. Secondly, it is pointed out that the figures of sales given in Annexure-0 referred to sale of cloth, both grey and processed. The processing may be bleaching, dyeing, printing, etc. The cost of raw materials, namely, cotton and fiber and yarn is upto the stage of grey fabrics and there is no addition to the said raw material cost in any processing of grey cloth. When each stage of processing takes place, there is addition to the value of the clothes resulting in the higher sales price without affecting raw material cost. It is pointed out that the figures of raw material cost taken in Annexure-0 do not include, any cost of chemicals, colours or bleaching ingredients. Thirdly, it is pointed out that the company may not itself process grey fabrics but may get the same processed by processor on payment of processing charges. In such cases, cost of colour, chemicals and bleaching, etc., would be included in the processing charges. Therefore, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance, is an attempt to totally oust the minority by suppressing and oppressing it to the status of helpless non-entity. It is submitted that in fact by various steps taken by Arvind N. Mafatlal spread over a period of last 10 years, the dubious device of getting total control of MIL to the total exclusion of MHM Group, could be clearly seen and, therefore, not only the history of family arrangement and other historical facts relevant to the family of late Mafatlal Gagalbhai and its industries and business are required to be seen, but, in fact, the Corporate veil is required to be lifted in order to find out as to whether Arvind N. Mafatlal has treated the entire business empire as if it is his fiefdom. Before I proceed to consider the alternative submission, I would at this stage record my finding that it cannot be said that the proposed Scheme of Amalgamation is not for the stated objectives as brought out in Explanatory Statement. In short, it shall have to be stated that the proposed Scheme of Amalgamation may achieve the avowed objectives as set out in the statement. 61. On such finding being reached it is submitted that objection No. 2 also stands squarely answered. However, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d be seen. The various companies including MIL and M.F. and subsidiaries thereof were and are in reality just the puppets of Arvind Mafatlal. He controlled their every movement, each company or subsidiary danced to his bidding. He pulled the strings. Transformed into legal language, two companies and their subsidiaries were merely agents of Arvind N. Mafatlal to do as he commanded. He was the principal guiding (misguiding!) spirit behind all steps systematically and schemingly taken. He has, therefore, submitted that this is a fit case where the court should not proceed by corporate personality of MIL or MF but should pierce or lift the veil of corporate personality and if this exercise is undertaken, the court would be more than convinced that Arvind Mafatlal was the moving spirit controlling all companies and subsidiaries as if all companies were his fiefdom. He has very strongly urged before this Court that if various steps enumerated hereafter which are taken either by MIL or by Arvind N. Mafatlal as the moving spirit of MIL are taken into account, a dubious diabolical device to gradually usurp and control the companies which would have otherwise fallen to the share of MHM Grou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mafatlal and Rasesh Mafatlal. It was then felt that some arrangement should be worked out whereby there would be separation and division of the family business amongst four branches, viz., Miheer's family (MHM Group), family of Arvind Mafatlal (ANM Group), the family of Yogindra Mafatlal (YNM Group) and family of Rasesh Mafatlal|(RNM Group). It is his further case that Mr. C.C. Chokshi was requested to prepare a scheme for division of family business and he prepared a Note dated 23rd of February, 1979 making six suggestions for the division of Mafatlal Group of Industries into four groups. For this purpose, opinions of Mr. J.C Shah, former Chief Justice of India, Mr. Ambalalbhai S. Parik, Solicitor and Mr. J.M. Thakore, Advocate General of Gujarat High Court, were sought by Mr. C.C. Chokshi. It is the case of Miheer that suggestion No. V put forth by Mr. C.C. Chokshi with minor modifications was accepted in the meeting held on 1st March, 1979 in which over and above the three brothers, Miheer and two sons of Arvind Mafatlal remained present. Miheer has extensively relied upon this Note of Mr. C.C. Chokshi dated 23-02-1979 and minutes of the meeting held on 1st March, 1979. By refer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company is held by RNM Group. However, third subsidiary company, which was to be floated as per understanding was not floated. In fact, companies of Group A & B were kept together because of the young age of Miheer. According to Miheer, Arvind Mafatlal had different plans and non-floating of the third subsidiary company was the First Step taken by Arvind Mafatlal in the direction of getting control of Group-A. It is the case of Miheer that had he floated the third subsidiary company and hived out M.F. and PIL, he would have lost control over the companies, namely, MIL, then MEIL and NOCIL. In order to continue to control these companies, Arvind Mafatlal did not take any step to float a third subsidiary company of MIL as he never wanted to give up his control over the vast Mafatlal empire and he never wanted to give Miheer due share in the management and control of the Industries of the Mafatlal group. He has pointed out that instead of getting transferred the holdings of YNM Group and RNM Group in MIL, Arvind Mafatlal misused his fiduciary position and for oblique motive got the shares held by YNM Group and RNM Group transferred to his group and to a company where he had a control ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... belonging to Group B which was ultimately to go to ANM Group. By this method, the entire shares of MIL held by Padmashree Synthetics Pvt. Limited were got transferred by Arvind Mafatlal to the companies controlled by him and this step was a deliberate step taken by Arvind Mafatlal to gain greater control over MIL. 66. The Fourth Step attributed to Arvind Mafatlal with a view to gaining greater control over MIL is that he purchased three per cent shares in MIL from Yogindra Mafatlal in 1987 contrary to stipulation in family arrangement of 1979 under which the shares of MIL ought to have been sold to MHM group by Yogindra Mafatlal. The transfer of shares of MIL by Padmashree Synthetics Pvt. Ltd. to PIL and the purchase of shares of MIL by ANM group from YNM group resulted into ANM Group having control of almost 20 per cent shares in MIL. 67. The Fifth Step attributed to Arvind N. Mafatlal is that of offer of Right Issue of 1987 of MIL. In or around May 1987, the MIL offered 8,10,000, shares of the face value of Rs. 100 each for cash at a premium of Rs. 200 per share to the existing shareholders on right basis of one share for one equity share held on 11-4-1987. The Right Issue ope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of Miheer and his family and, thus, he has succeeded in enhancing his financial control over MIL and in substantially reducing control of MHM Group in MIL. It is pointed out that the shareholding pattern underwent substantial change after Right Issue of 1987 and percentage of shares held by Arvind Mafatlal and companies controlled by Arvind Mafatlal and his family went from 20 per cent to 35 per cent in MIL while the shares held by Miheer and the members of his family, trusts and companies went down from 17.39 per cent to 10.47 per cent. 69. It is pointed out as 7th Step that in Right Issue of 1987 more than 55 per cent of the shares were cornered by and allotted to ANM Group and companies controlled by Arvind Mafatlal. The sole object of Arvind Mafatlal in floating Right Shares was not to benefit MIL but was solely to gain greater control over MIL so as to reduce Miheer and the members of his family to a helpless minority. 70. The 8th Factor, rightly not described as a step is that because of some family circumstances, ANM Group wanted to take vengeance against Miheer. He has pointed out that son of Arvind Mafatlal, namely, Padmanabh was a confirmed alcoholic and he used to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efendants to the counter-claim, their nominees and members of their respective groups be ordered and decreed :- (i)to give to the plaintiff to the counter-claim irrevocable proxies on all shares held by them in the companies mentioned in Exhibit "17" to the counter-claim. (ii)to forthwith tender their resignations as directors of the companies mentioned in Exhibit "17" to the counter-claim and to appoint the plaintiff to the counter-claim and/or his nominees as directors in substitution of the resigning directors; (iii)to tender their resignation from all the trusts mentioned in Exhibits "8" and "10" to the written statement. (iv)pending inter se transfer of shares between the groups if they or any of them desire to effect sale of shares in any of the companies mentioned in Exhibit" 17" to the counter-claim they give to the plaintiff of the counter-claim the first option to refusal in exercise of the right of pre-emption of the plaintiff to the counter-claim under the said family arrangement. 72. It is the case of Miheer that if proposed Scheme of Amalgamation is sanctioned by this Court, this substantial counter-claim wherein he has prayed for abovementioned reliefs, would be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 members present either in person or by proxy holding 2048513 fully paid-up equity shares of Rs. 100 each aggregating to Rs. 20,48,51,300. This would work out to 77 8 of total share capital. He has further pointed out that the total number of shareholders of the petitioner-company is 94674 as against which 5522 shareholders either personally or by proxy remained present at the meeting. In the context of shareholders only 5.83% of total shareholders attended the meeting and 94.17% of shareholders have not attended the meeting. His submission is that if majority of actual shareholders is to be taken into account, substantial number of shareholders have remained absent and only 5.83% of the total number of shareholders have attended the meeting. However, if on the basis of paid up capital the majority is to be determined, 77% of the total shareholders was represented in the said meeting out of which 73.02% voted in favour of the scheme while 3.24% voted against the scheme and 0.95% did not exercise the vote. In his submission, 73.02% who voted in favour of the scheme can be divided into three groups, i.e:. (a)the shares held and controlled by ANM group and the companies controlled b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y decision or resolution of majority which is adverse to the interest of minority, may give rise to feeling of suppression or oppression. The minority may develop the feeling that it is being coerced or that it is being ignored. In such case duty of the court of exercising its judicial discretion becomes a delicate duty. Even if the requisite majority has sanctioned the scheme, the Legislature has desired that the court must be approached and its sanction must be obtained. The courts, therefore, shall have to apply its judicial mind. Even when the scheme is passed by the majority, it may affect the interests of the dissentients or the minority and it may affect the interests of those who might not have voted or failed to vote. It is in this context that the observations made by Miabhoy, J. (as His Lordship then was, Sidhpur Mills Co. Ltd. (supra) assume importance: "... In a case where a scheme is voted by a majority, two conflicting claims are to be adjusted. If, on the one hand, a minority were to take up an unreasonable attitude in the matter of the scheme, then the interests of the majority will suffer if the scheme cannot be pushed through - a scheme which the majority consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bly a right to expect and make. In every case the court must be satisfied that the majority is acting in a bona fide manner. It is only if the majority is acting honestly and with due care and cooperation that the decision will be binding upon the minority. If the court finds that the majority is acting in a mala fide manner, then it is the duty of the court to protect the minority from tyranny of the majority. It is in the context of this position of law that this court shall have to examine the aforesaid factors or systematic steps attributed to Arvind Mafatlal for elimination or exclusion of minority. The broad defence put up by the company to the aforesaid objection may at this stage be summarised : Defence 80. Firstly, the Note of family arrangement prepared by Mr. C.C. Chokshi, dated 23-2-1979 produced by Miheer at Annexure "E" containing six possible suggestions for dividing among four groups, 12 companies, their business, estates and properties is merely in the nature of draft or proposal, it having not been finally accepted by all the parties by executing formal deed of family arrangement. Secondly, the text of the minutes of the meeting dated 1-3-1979 produced by Miheer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the record of this case that on 23rd July, 1985 Miheer addressed a letter to Arvind Mafatlal expressing his desire to segregate his group from the group of Arvind Mafatlal to the Yogindra Mafatlal and Rasesh Mafatlal and immediately thereafter on 27th July, 1985 addressed a letter to Arvind Mafatlal offering on their behalf and on behalf of respective members of their families and companies to sell balance of equity shares of MIL held by them at a fair price to Arvind Mafatlal. They called upon Arvind Mafatlal to convey his decision within 48 hours with further stipulation that exact price of shares shall be agreed upon mutually within a period of 96 hours after Arvind Mafatlal conveyed his agreement in principle to buy out their shares. It was also stipulated in such letter that they have made such an offer to Arvind Mafatlal after concurrence of Miheer on behalf of himself and his branch has been obtained. They also stated that the offer made by Miheer and others is one complete deal. Miheer has also on that very day, i.e., 27-7-1985, addressed a letter to Arvind Mafatlal, inter alia, stating that he on his behalf and on behalf of his family was offering to sell all the equi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was concerned, there was not the slightest doubt that when a senior counsel stated that the matter was settled, consent was subsequently withdrawn by Miheer. Based on the aforesaid development it is submitted that as back as 1987 all attempts were made to settle the family disputes amicably and practically all disputes were settled and at the last moment Miheer had backed out. It is thereafter that he has filed counter-claim in that very suit for enforcement of family arrangement of 1979, and in such proceedings also no prohibitory order is obtained by him. Miheer having, thus, expressly agreed in his correspondence to sell all the equity shareholdings of his branch to Arvind Mafatlal at a fair price to be fixed cannot now resuscitate the old family arrangement of 1979. By his conduct, he has deprived himself of any such relief. Seventhly, it is pointed out that Miheer has been continuously trying since 1985 to thwart the progress of MIL. He having first agreed and offered to sell shares of his group of MIL to Arvind Mafatlal, he backed out. Thereafter, when an attempt was made by the company to increase its authorised share capital from Rs. 10 crores to Rs. 50 crores, Miheer in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e year 1985 alleged family arrange ment of 1979 is replaced by subsequent agreement as could be read from exchange of correspondence between the parties. 82. It is lastly submitted that neither the family arrangement of 1979 nor the agreement of 1985 binds the company (MIL) or its shareholders. In the matter of voting rights as well as in the matter of statutory rights flowing from the provisions of Companies Act the entire class of share holders of MIL does not owe any fiduciary relationship to the minority shareholders. The entire class of shareholders while voting on the question of amalgamation of MF with MIL is not required to take into account the hazards of private arrangement or family arrangement between the members of family. It is submitted that a different principle cannot apply and should not apply in a case of dissenter like Miheer who has at every stage by his negative and obstinate approach thwarted or tried to thwart the progress of the company. In this connection attention of the Court is invited to the decision of the Supreme Court in the case of Hind Overseas (P.) Ltd. v. Raghunath Prasad Jhunjhunwalla AIR 1976 SC 565. In the said case question arose in the con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which will be visible. The equity shares held by other shareholders and financial institutions are more in number than the equity shares held by ANM group. It is, therefore, not correct to state that in all the subsidiary companies a towering personality of Arvind Mafatlal is to be seen wearing different hat. In fact, just and equitable treatment which was offered to Miheer in response to his offer to sell away his shares of MIL to Arvind Mafatlal, Miheer has rejected, and as noted by S.N. Variava, J. of Bombay High Court he has backed out. It is not, therefore, a case where a majority group or Arvind Mafatlal can be said to be coercing Miheer or his group and proposed scheme of amalgamation cannot be regarded as one whereby the proprietory rights of Miheer and his group are confiscated or forcibly acquired. It was, therefore, urged before this court that it cannot be said that the proposed scheme of amalgamation is with ulterior motive or it lacks in bona fides. 85. Consideration of large number of factors thrown by each side in the scales of balance so as to find out bona fides or otherwise of the proposed scheme of amalgamation is a very difficult task. This court shall have to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company is as laid down in Articles of Association, if any. On the facts of the case before the Supreme Court as discussed hereinbefore it was found that the agreement between the parties was not acted upon so as to amend the Articles of Association to bring them in conformity with such agreement. In absence of amendment of Articles of Association the Apex Court took the view that the company was not bound by the agreement between the brothers, and, therefore, the agreement was not enforceable. The terms and conditions of the alleged family arrangement of 1979, more particularly, the Suggestion V thereof, were firstly not acted upon and secondly to such a family arrangement the present company-the MIL or other companies-were not parties. Thirdly, the enforcement of alleged family arrangement would necessarily involve transfer of shares of MIL from all groups to MHM group and the transfer of shares of other companies by MHM group to other groups. Such family arrangement and/or agreement to be binding upon MIL or other companies must be incorporated by necessary amendment of Articles of Association of MIL so as to be binding upon and enforceable against MIL. Admittedly, since 1979 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made in pending proceedings before the Bombay High Court to read a concluded contract between the parties to which reference is required to be made. Miheer has in his objection referred to suit filed by Arvind Mafatlal being Suit No. 1906/85 in the High Court of Bombay against his two brothers as well as Miheer. He has also referred to the exchange of subsequent correspondence between Arvind Mafatlal, Yogendra Mafatlal, Rashesh Mafatlal and himself (Miheer) in the year 1985-86. It is thereafter that Arvind Mafatlal filed C.S. No. 1010/87 in the High Court of Bombay against his two brothers and Miheer and prayed for declaration that there existed a valid and subsisting binding or concluded agreement between Arvind Mafatlal on one hand and Yogendra Mafatlal, Rashesh Mafatlal and Miheer Mafatlal and members of their respective families on the other hand to sell off their shareholding in MIL to Arvind Mafatlal and his branch. It is in this suit that reference is made to the correspondence that was exchanged between the parties, more particularly, between Arvind Mafatlal and his two brothers and Arvind Mafatlal and Miheer. Material portion of the text of such correspondence is reproduce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to Arvind Mafatlal calling upon him to purchase his shareholdings in MIL at a fair price, he was then ready and willing to give a go-by to his rights, if there were any, under the family arrangement of 1979. This factor strongly weighs against Miheer when he is claiming enforcement of alleged family arrangement of 1979. It can be stated that even at that stage in 1985-86, though his was not a majority shareholding, it was a substantial shareholding and even then he had offered (agreed) to sell his shareholding to Arvind Mafatlal. Prior to instituting his counter-claim in the very suit except his letter, dated 23-7-1985, Miheer has never sought enforcement of family arrangement and in my opinion by subsequent correspondence he has given a go-by to his rights flowing from alleged family arrangement. On facts, I am, therefore, not inclined to hold that the proposed scheme of amalgamation would defeat the rights of Miheer and his group flowing from alleged family arrangement of 1979. The subsequent development and offer of Miheer to sell his shareholding to Arvind Mafatlal would go to establish that he has reconciled to a position of encashing his shareholding in MIL provided he was o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... forcement of family arrangement there is substantial claim of Arvind Mafatlal to enforce concluded contract alleged to have come into existence in the year 1985 by way of correspondence between the parties. That apart, these are private arrangements between the parties to which legal person - MIL is not a party. Admittedly, the Articles of Association of MIL are not amended so as to make the family arrangement of 1979 or subsequent concluded contract of 1985 part and parcel of Articles of Association of the MIL. Consistent with the principle of law enunciated by the Supreme Court it is not possible for this court to agree with Miheer and to accept his submission that the concealed object behind the proposed scheme of amalgamation is to defeat the family arrangement of 1979 or to non-suit him in his counter-claim. It would not be out of place to mention at this stage that neither in the suit filed by Arvind Mafatlal nor in the counterclaim filed by Miheer the MIL is a party. To what extent an enforceable order against MIL could be passed in such civil proceedings would be a matter of anybody's guess and matter being subjudice before the Bombay High Court this court is of the opinion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ary to the stipulation in the family arrangement. In my opinion, the aforesaid three steps are based on the assumption that there existed an enforceable family arrangement under which Miheer and his MHM group was to get total control of companies falling in group "A" including MIL. Firstly, Note prepared by C.C. Chokshi at Annexure "E" contains six possible modes of division of companies and assets. By no stretch of imagination it can be described as concluded or agreed family arrangement enforceable at the instance of any party. Secondly, petitioner-company, i.e., MIL is not a party to such family arrangement. Neither as a legal person nor its shareholders are in anyway bound by stipulation of family arrangement. Thirdly, in view of the decision of Supreme Court in the cases of S.P. Iain ( supra) and V.B. Rangaraj ( supra ), the family arrangement of 1979 and/or subsequent concluded contract pleaded by Arvind Mafatlal, not being incorporated in the Articles of Association of the MIL are not binding on the petitioner-company or its shareholders so as to restrict the right of shareholders to sell or transfer their shares in favour of MHM group only. It may be noted that under the fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng of Miheer himself that he agreed under the advice of elderly persons. Non-formation of a third subsidiary company at that stage perhaps could have been explained. Even other wise, why the third subsidiary company was not formed could have been stated before this court by Arvind Mafatlal himself. But that omission on his part to controvert the allegations made specifically against him should not result into necessary inference of mala fides. In my opinion, the 1st, IIIrd and IVth steps do not go to establish any mala fides on the part of Arvind Mafatlal. Mala fides of individual even otherwise would not assume much importance while deciding the question of granting sanction to scheme of amalgamation which is supported by overwhelming majority of members who were present and voting. 94. As regard Vth, VIth and VIIth steps referable to Rights Issue of 1987, it is the case of Miheer that the sole intention of Arvind Mafatlal was to gain greater control over MIL by increasing shareholding of ANM group. By VIth step he has tried to demonstrate before the court that Arvind Mafatlal, in fact, not only strengthened the position of ANM group but prevented MHM group from subscribing to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (iii)The Right Issue did not achieve its desired objective but it was undersubscribed and the major subscription was from ANM group and other financial institutions. (iv)Prior to floating of Right Issue, Arvind Mafatlal instituted CS No. 1010/87 and obtained prohibitory injunction against Miheer and MHM group from mortgaging their shares of MIL, in any manner transferring or pledging their shares and from renouncing their rights in favour of anyone except Arvind Mafatlal. Such a prohibitory injunction continued till the date of closure which incapacitated Miheer and his group from subscribing to the Right Issue and the resultant effect was to increase the shareholding of ANM group and reduce MHM group to a helpless situation. Contrary to injunction issued by the City Civil Court at Ahmedabad even before the closure of Rights offer on 3-7-1987 and even before it was known to MIL whether the rights were going to be fully subscribed or not NOCIL, a company allegedly controlled by ANM group applied for allotment of 1,50,000 shares and despite prohibitory injunction against allotment from unsubscribed portion of capital, shares were allotted to NOCIL and similarly in breach of order o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the shares of MIL held by other persons or their companies or their trusts. They were also restrained from renouncing the Rights Shares in favour of any party excepting Arvind Mafatlal. These actions taken by Arvind Mafatlal have incapacitated Miheer and his group from accepting offer of Rights Shares by subscribing for such Rights offer. Even if it is accepted that the decision of Rights Issue of 1987 was taken by the Board of Directors and was the decision of the company, and even if the court may not pronounce upon the wisdom or otherwise of the decision of the company, the reason why Arvind Mafatlal was prompted to file said suit so as to totally incapacitate Miheer and MHM group from subscribing to the Rights Shares is not forthcoming. This conduct of Arvind Mafatlal would, undoubtedly, create doubt in the mind of a right minded person. By such action one group has undoubtedly achieved the purpose of enhancing its shareholding in MIL while another group is reduced to helpless minority. This step of institution of suit and of obtaining injunction may in ultimate analysis create more doubt about the intention of Arvind Mafatlal. However, his own thinking or intention may not ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luded contract as read from the correspondence exchanged between the parties in 1985. However, the fact that he was an elderly person in whom Miheer and his family members reposed confidence and trust is of equal importance. The factors and considerations are so equally poised in this case between two groups and as observed by me hereinabove it is a delicate function of weighing the adverse factors in two scales. One additional factor to which Miheer has adverted to being factor Step VIQ enumerated hereinabove might have contributed to the rift between family being widened. However, when the proposed scheme of amalgamation is, as found by this court, likely to achieve all or any of the stated objectives, it would be wrong to hold that the scheme is vitiated by lack of good faith or bona fides. The VIth step attributed to Arvind Mafatlal has, undoubtedly, resulted into gaining greater control by his group over MHM group, but at the same time, the action of Miheer in renouncing Rights share in 1992 would establish that on his part there was no desire to hold and manage the MIL or to get control over the MIL. In fact, the offer made by him in the year 1985 would also support the concl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the steps after steps taken by the company since 1987 were at the instance and command of Arvind Mafatlal and were directed towards gaining greater control over the MIL and towards reducing the control of Miheer or MHM group. He has further submitted that, in fact, MIL is utilised by Arvind Mafatlal as a tool to achieve his goal and that there is no difference between MIL and Arvind Mafatlal. In his words, they are mere alter-ego of each other and it is in such circumstances that the court should lift the veil. He has in this connection invited the attention of the court to the decision of Court of Appeal in Moir v. Wallersteiner [1974] (3) All ER 217. Before the Court of Appeal, question arose in the context of action for libel instituted by Dr. Wallersteiner. One Mr. Moir who was working in Stock Brokers Office challenged Dr. Wallersteiner, a man of influence in the city of London and issued a circular in March 1967 criticising Dr. Wallersteiner up hill and down dale. He sent the said circular to the shareholders of Hartley Baird Ltd. which was a public limited company. Dr. Wallersteiner gained control over it in 1962. He was in-charge of 80% shares. Remaining 20% shares we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n substance was alter-ego of Dr. Wallersteiner. Each was in reality Dr. Wallersteiner wearing another hat. The court was, thereupon, called upon to lift the veil and to find out as to whether actually the companies, trusts and legal entities were in anyway different from Dr. Wallersteiner. It was in this context that Lord Denning MR recorded a finding that various companies were just puppets o Dr. Wallersteiner, he controlled their every movement. Each danced to his bidding. He pulled the strings. No one else got within reach of them. Transformed into legal language, they were his agents to do as he commands. He was the principal behind them. It was after recording such finding that the court felt that the corporate veil was required to be lifted and if lifted, it was the action of one man alone and that Dr. Wallersteiner was the moving spirit. 99. On the analogy of the fact situation which obtained in the aforesaid case, Mr. MJ. Thakore, Ld. advocate for Miheer submitted before this court that the position of Arvind Mafatlal in entire Mafatlal empire is that of Dr. Wallersteiner. He submitted that in MIL and MF as well as in various other companies, trusts and legal entities it w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d observations of courts of law in mind, it was submitted before this court that this is a fit case where the court must lift the veil of corporate personality, namely, MIL and must try to find out whether Arvind Mafatlal is the alter-ego of MIL, or as to whether the MIL simply dances to the tune of Arvind Mafatlal. 102. In my opinion, the shareholding pattern of MIL and total shareholding of Arvind Mafatlal group in MIL prima facie, would not justify the conclusion that the MIL dances to the tune of Arvind Mafatlal. The shareholding of Arvind Mafatlal or ANM group would work out to 30.42% approximately. As against aforesaid shareholding the shareholding of financial institutions in MIL would work out to 30.0396 and that of MHM group works out to 5.21% and while that of other shareholders would work out to 34.3496. Hence, it cannot be said that the leadership of the company is vested in the hands of few businessmen occupying the strategic position of great power. It is not a case where business leaders often promote amalgamation which may appear at first sight to be successful, prudent or even beneficial to the shareholders, but may in fact conceal the clever design of those whose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s holding in MIL can be said to be so numerous, huge or large so as to outwit all other shareholders to non-entity. From the figures hereinabove it becomes clear that the shareholding of that group was at no point of time so commanding that it can be said to be in a position to coerce the rest of the shareholders. In my opinion, therefore, it is not a case where the doctrine of lifting of veil of corporate personality can be applied here when more than requisite statutory majority has voted in favour of the scheme. It is required to be kept in mind that this voting pattern would also include the voting of financial institutions and such institutions are ordinarily not expected to vote blindly at the instance of a group or individual person. Taking all these factors into consideration, it is not possible to agree with Mr. Thakore, Ld. advocate for Miheer that in fact Arvind Mafatlal was a driving force or moving spirit in all the steps taken by the company from 1985 onwards. It is also not possible for this court to agree, therefore, to lift the veil of corporate personality so as to see only the towering personality of Arvind Mafatlal behind the corporate veil of MIL. In my opinion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uted by Arvind Mafatlal being CS No. 1010/87 Miheer has undoubtedly filed counter-claim for specific performance of Suggestion V of family arrangement of 1979. Before the Bombay High Court, there are two rival versions and two rival arguments. MHM group is claiming enforcement of family arrangement of 1979 and as against it ANM group or Arvind Mafatlal is seeking enforcement of subsequently concluded contract from correspondence of 1985. It would not be out of place to mention that the MIL as a company is not a party to this arrangement or agreement. MIL as a company is also not a party to the suit or counter claim. It is also not disputed before this court that neither family arrangement nor agreement of 1985 is made part and parcel of Articles of Association by duly amending the Articles of Association. Unless the Articles of Association are amended MIL is not bound by such agreement or arrangement. In view of aforesaid the pendency of such proceedings cannot be the sole ground for withholding sanction to a scheme of amalgamation till such proceedings are decided. The court shall also have to keep in mind the fact that despite family arrangement of 1979 Miheer has by his own let ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of shareholders of MIL. One share holder has even raised such a query, to which Chairman of the Meeting Mr. Arvind N. Mafatlal could not give appropriate reply. He has, therefore, submitted that substantial higher cost of labour of MF compared to that of MIL is contraindicative to the proposed Scheme of Amalgamation. (4)The average debt equity ratio for the last five years of Mafatlal Fine and MIL are compared and they are stated to be as under: M. Fine ... 2.08:1 MIL ... 1.20:1 It is submitted that Debt Equity Ratio of Mafatlal Fine is adverse and as a result of amalgamation MIL will be required to take over huge debts of M. Fine which would reduce the profitability of MIL and would be against the interest of the shareholders of MIL. It is submitted that MF has an adverse debt equity ratio. (5)Apart from having huge investments in other companies, MIL is also owning two commercial properties in the City of Bombay, which are very valuable assets of the Company. The said properties are 'Mafatlal House' near Mantralaya and 'Mafatlal Centre' at Nariman Points. These two assets which are presently available to MIL and ultimately t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y or on behalf of his group or family members, should be agitated in the meeting of equity shareholders so that there is full discussion and deliberation on the issue and the shareholders effectively participate and decide as to how the proposed scheme of amalgamation is not in the interest of the transferee-company or its equity shareholders. A shareholder ordinarily should not be permitted to question the wisdom of the statutory majority of shareholder by asserting that though approved and passed by majority, proposed scheme of amalgamation is against the interest of transferee-company or its shareholders. Miheer has in his connection not given any explanation as to why he has not raised any objection to the proposed scheme of amalgamation on this ground when he was satisfied and was having necessary material to assert that the proposed scheme of amalgamation was not in the interest of the transferee-company. Miheer having failed, knowingly and deliberately to raise any objection on this count ordinarily cannot be permitted to veto and smother the will of the majority when it was so eloquently and convincingly expressed. It was in the context of such conduct that His Lordship Jus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overall profit after tax for last five years in MIL at Annexures M and N to Miheer's reply is not correct as while working out such Earning Per Share, loans written off for Rs. 0.90 crore in 1988-89 and Rs. 5.56 crores in the year 1991-92 have been taken into account, whereas Annexure E to the report of C.C. Chokshi & Co. it is mentioned in the Footnote as under: "The amount in respect of Mafatlal Engineering Industries Limited (MEIL) written off in 1990-91 of Rs. 5.56 crores as is not considered as the same is non-recurring in nature." 107. Similarly, it is pointed that while preparing Annexure N to the affidavit of Miheer, the profits for the years 1988-89 and 1990-91 have been deflated to Rs. 1.18 crores from Rs. 1.32 crores for the year 1988-89 and Rs. 4.61 crores from Rs. 7.39 crores for the year 1990-91 while taking the year 1988-89, the provision for taxation at Rs. 0.41 crore instead of Rs. 0.26 crore and by taking account of written off of loan of Rs. 2.78 crores to MEIL during the year to reduce the profits from Rs. 7.39 crores. It is further pointed out that in the context of the determination of exchange ratio for the purposes of the Scheme of Amalgamation, the loss o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he earning per share. The shareholders of MF would receive higher earning on amalgamation but that would be at the cost of the existing earning of shareholders of MIL. 110. While discussing the question of determination of Fair Exchange Ratio, this court would dwell upon the question of Earning Per Share and to what extent Earning Per Share of each company can constitute relevant factor for fixing the Fair Exchange Ratio. However, if it is found that there are other methods by reference to which Fair Exchange Ratio could be worked out, the differentiation between the Earning Per Share would not be a very valid consideration to hold that low profit earning of MF would substantially reduce the Earning Per share of Equity Share holders of MIL. Moreover, this factor of Earning Per Share ordinarily is always taken into consideration by the class of equity shareholders while considering and voting in favour of or against the Scheme of Amalga-mation. When statutory majority of equity shareholders have voted in favour of the scheme, they have not found the Scheme to be opposed to their interest nor they have found that proposed amalgamation would in future affect the Earning Per Share of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as compared to some other varieties. It is pointed out that comparison in Annexure "O" by Miheer between percentage of raw- material cost to sales is misleading. The figures of sale given in Annexure "O" are the figures of turnover of textiles comprising cloth, yarn, waste, etc., given in Notes on Accounts and Directors Report of MIL which includes sales of goods traded in, i.e., sales of cloth purchased and sold. Moreover, the figures of raw material cost taken in Annexure "O" would comprise the cost of raw material consumed, namely, cotton, fibre and yarn (purchased) only. It does not include any part of the cost of cloth purchased and sold. Therefore, the ratio raw material cost to sales as worked out in Annexure "O" would be higher if in the figures of sale, the component of purchased cloth vis-avis manufactured cloth is lower. For the purpose, break-up of the figures of sales into those for cloth manufactured and sold and those for textiles purchased and sold, is required to be given, which the company has given at Annexure "I" to the affidavit-in-rejoinder. From such statement, it is pointed out that in the case of MIL, the component of cloth purchased and sold is higher tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ost compared to the manufacturing cost of MIL. From the various details furnished by the company in the affidavit-in-rejoinder as well as from comparative statements annexed to the affidavit-in-rejoinder, it can be said that it would be hazardous to conclude, solely based on the statement at Annexure 'O', that manufacturing cost or raw materials cost in case of Mafatlal Fine being higher than that of MIL, the proposed Scheme is not in the interest of the shareholders of MIL. In fact, the conclusion itself is not justified that such cost is higher because both the companies manufactured and traded in large number of textile items. There are various processes involved in manufacturing final textile-products. The distinction between the final textile cloth of the grey fabric is well known. The dealing in grey fabric would necessarily exclude a large number of processes while dealing in finally processed fabric would include a large number of processes calling for large quantity of raw materials. The various other benefits which flow from export of the product to which the affidavit-in-rejoinder makes reference are also relevant. A Court of Law is ill-equipped in working out the releva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IL to amalgamate to such a company. Such amalgamation would ultimately cut into the profits of the postmerger MIL and would substantially reduce the Earning Per Share of the shareholders of MIL. In fact, he has pointed out that one Shareholder of MIL did raise a query to the Chairman of the meeting and that Arvind Mafatlal thought it fit not to answer such query. I have already adverted to such query raised by a shareholder, namely, one Jitendra Sanghavi. He expressed his view that the shareholders do not doubt the anxiety and integrity of the Chairman in proposing the Scheme of amalgamation. However, he pointed out that since the MF has two units in Bombay, their labour cost is very high and as a result, the profitability of Mafatlal Fine goes down and it is not in the interest of shareholders of the company to amalgamate the Mafatlal Fine. In fact, to such a query, the Chairman has replied by stating that labour cost in any particular unit cannot be taken into isolation without considering the skills and efficiency of the labourers and other advantages. 117. Even on the aspect of labour cost, in the affidavit-in-rejoinder, it is pointed out by the MIL that the figures given in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of skilled and technical personnel whereas for the manufacture of dye intermediates and chemicals at MIL's unit at Dewas skilled labour of any high extent is not required. The employees in the MIL at Bombay are more skilled and efficient as compared to the employees of its units at other places. For this reason, the extent of rejection of Grey Fabrics in the export market is much lower in the case of Mafatlal Fine than in MIL's New Shorrock Mills at Nadiad (Gujarat). It is also pointed out that though labour cost in textile division at Bombay is higher compared with the labour cost in Gujarat, other cost such as electricity are higher in Gujarat and following comparable table of power cost per energy unit purchased at Mafatlal Fine's Bombay unit and MIL's unit at Ahmedabad and Nadiad brings out as to how even while calculating labour cost, number of other factors must enter consideration:- Year MF MIL Bombay Ahmedabad Bombay 1988-89 1.02 1.37 1.42 1989-90 1.14 1.51 1.45 1990-91 1.21 1.58 1.51 1991-92 1.38 1.77 1.97 1992-93 1.83 1.92 2.19 121. It is therefore submitted by MIL that in the context of the scheme of amalgamation, any compari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the other company which is in better financial position and can convert this handicap of the first company to the overall advantage of the amalgamated company. 125. In affidavit-in-rejoinder, Miheer has referred to following observations from the Annual Report of MF : "The company proposes to pre-pone the date of conversion/redemption of Part B of Rs. 340 of 12.5% Secured Convertible Debentures at a premium of Rs. 240 into one equity share of Rs. 100 each on 1st November, 1992 instead of 8th August, 1993. The approval of the said debenture holders is proposed to be obtained at their meeting to be held on 5th August, 1992 as also a separate resolution is being proposed at item No. 11 of the Notice of the ensuing Annual General Meeting." 126. He has submitted that above exercise was undertaken solely with a view to presenting a healthier Debt Equity Ratio of Mafatlal Fine. He has submitted that by preponing the conversion of 12.5 secured convertible debentures by one year, the Debt Equity Ratio is 1.6:1 of Mafatlal Fine. 127. It is pointed out by MIL that the resolution to prepone the date of conversion/redemption of Part B of Rs. 340 of 12.5% Secured Convertible Debentures at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res of Mafatlal Fine will have returns by way of dividends, but they do not have very stable assets in view of the substantial contingent liability. In my opinion, in view of my finding already recorded on the question of Earning Per Share, no separate finding is required. Even otherwise, pre- amalgamation, average return to the shareholders of the amalgamating companies has no bearing in the matter of justification or otherwise of the amalgamation. It might assume importance only for the purpose of determining Fair Exchange Ratio in which shares in transferee-company would be allotted against shareholding in transferor-company. 129. As regards to substantial properties, namely, 'Mafatlal House' and 'Mafatlal Centre', it is pointed out by MIL that substantial area of such properties are let out or are given on licence to the tenants. Even Mafatlal Fine itself occupies about 17,000 sq. feet area in 'Mafatlal Centre'. It is also pointed out that Mafatlal Fine has also other commercial assets. It is owning nine flats in Bombay, of which four are situated in South Bombay at Nariman Point, at Church Gate and at Cuff parade and at Peddar Road. Reference to the said properties of MIL thu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ercial man. The Court will not view the Scheme with a view to find out whether it is an ideal Scheme. The Scheme has not got to be scrutinised by the Court with that much care with which an expert will scrutinise it nor will court approach it in a carping spirit with a view to pick holes in it. The Court will test the Scheme from the point of view of an ordinary reasonable shareholder acting in a business like manner. 131. Applying the aforesaid criteria to the proposed Scheme of Amalgamation, this Court shall have to sit in the Arm chair of a reasonable and fair minded shareholder. In fact, number of objections put forth by Miheer to contend that the proposed Scheme was not in the interest of the equity shareholders of MIL are in substance referable to the commercial aspect involved in the Scheme of Amalgamation. The question of manufacturing cost based upon raw material cost, or the question of labour cost being higher in transferor-company (M.F.) than the transferee-company (MIL) are complex questions of working of commercial or industrial units dependent upon a large number of attendant facts. The nature of product, whether product is a semi-final product or final product, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 shares of MF, 2 shares of MIL would be allotted. It is, therefore, not a case where the shareholders of MIL did not at all know the diversity in the rate of earning per share of each company. If it is likely to result into future reduction of their earning on the share of MIL, more than statutory majority of equity shareholders of MIL, would not have voted in favour of the proposal. It shall have to be borne in mind that substantial number of shares of MIL are held by financial institutions/Corporations and such Corporations would not have blindly voted in favour of the Scheme had the Scheme been disadvantageous to the shareholders of MIL. From the break-up of Equity Shares (fully paid) entitled to vote at the Extraordinary General Meeting held on 22nd January, 1994, it becomes clear that the financial institutions held around 30.03 per cent of total votes as against 30.42 per cent of total votes held by ANM Group. 30.03 per cent of financial institutions, i.e., total votes of financial institutions are cast in favour of the proposed Scheme of Amalgamation. Thus, shareholders are enlightened corporate management and it would not be unreasonable to assume that they must have appro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 391(1) of the said Act, the court may order a meeting of the creditors or class of creditors, members or class of members, as the case may be, to be called, held and conducted in such a manner as the court directs. This power of the court has to be read with the power of the court to issue necessary directions at the hearing of summons for directions taken out under section 391(1). Rule 69 of the Companies (Court) Rules empowers the Company Judge to issue directions which he may think necessary in respect of various matters enumerated therein which include the direction in respect of determining the class or class of creditors and/or of members whose meeting(s) have to be held for considering the proposed compromise or arrangement. Consistent with this provision the MIL moved an application under section 391(1) seeking various directions for holding the meeting of members of the company. On such application being Company Application No. 892/93, the learned Single Judge (Y.B. Bhatt, J.) of this court passed an order which, inter alia, included directions for appointing Arvind Mafatlal as Chairman of the meeting as well as following directions for convening of meeting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... distinct class is fatal and must result into vitiation of ultimate resolution. (B)It is submitted that the meeting of shareholders held on 22-1-1994, inter alia, included shareholders of the company who have been allotted shares pursuant to right issue of 1987 and 1992. Both the said right issues are subject to final outcome of Civil Suit Nos. 3181 & 3182 of 1987 filed by three shareholders and Civil Suit No. 5198/92 filed by Miheer. It is submitted that these shareholders or transferees from them may even cease to be the shareholders in the event of City Civil Court coming to conclusion that the issue was not in the interest of the company, and therefore, these shareholders ought not to have been permitted to participate in the meeting of 22-1-1994, or atleast, for such shareholders there should have been a separate meeting. (C)It is pointed out that some of the allottees in the Right Issue of 1987, such as, NOCIL and Sushrupada Investments Pvt. Ltd. have been allotted shares in utter violation and disregard of the order of the City Civil Court, Ahmedabad. These shareholders cannot be permit ted to participate in the meeting and their participation and voting has adversely affe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eholders of NOCIL and Sushrupada Investments (P.) Ltd. to whom the equity shares were allotted allegedly in breach of the order of injunction issued by the City Civil Court, Ahmedabad constitute a separate and distinct class or not, are the questions which shall have to be answered keeping, in mind the statutory requirement of section 391 of the said Act read with the provisions of rule 69 of the Companies (Court) Rules, 1960. 140. In substance, the question is 'would order of company court issuing directions for convening meeting under section 391(1) read with rule 69 be final so as to foreclose or shut out any objection on the ground that no proper class meeting was convened or held' ? Mr. Vakil submits that court having not ordered separate or distinct meeting, there is no need to call distinct or separate class meeting even if such class existed. 141. Palmer in his Company Law 24th Edn. p. 1140 in this connection observes as under: "The court does not itself consider at this point what classes of creditors or members should be made parties to the scheme. This is for the company to decide, in accordance with what the scheme purports to achieve. The application for an order fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... However, the question as to whether all such creditors constitute one class having common interest so as to confer and deliberate upon the issue in a common meeting or as to whether they have distinct conflicting interest so as not to be able to confer, discuss and deliberate upon the issue in joint or common meeting is a very vital question. The party who applies for such meeting cannot be absolved from the liability to bring to the notice of the court the conflicting, distinct and separate interest of persons in the same class or class within the class so that the persons having conflicting or distinct and separate interest are also provided effective opportunity to confer, deliberate, discuss and decide the issue. 144. In Hellenic & General Trust Ltd., In re 1976 (1) WLR123 Templeman, J. stressed that it is the responsibility of the applicants to see that the class meetings are properly constituted. In that case it was held that the majority shareholder, being a wholly owned subsidiary of the outside purchaser for the shares, constituted a separate class from the other shareholders and that accordingly the scheme failed. It was also suggested that a parent company owning 50 per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held that the holders of partly paid shares formed a different class from holders of fully paid shares. The objection was taken that there should have been separate meetings of the two classes, and Swinfen Eady, J. upheld the objection saying at p. 481:'......the objection that there have not been proper class meetings is fatal, and I cannot sanction the scheme.' Similarly, Eve, J. issued a practice direction, Practice Note (1934) W.N. 142, in which he reminded the profession, in dealing with the predecessor of section 206, that the responsibility for determining what creditors are to be summoned to any meeting as constituting a class rests with the petitioner, and if the meetings are incorrectly convened or constituted, or an objection is taken to the presence of any particular creditors as having interests competing with the others, the objection must be taken on the hearing of the petition for sanction and the petitioner must take the risk of having the petition dismissed. The direction applies equally to meetings of shareholders." 145. From the aforesaid observations it becomes clear that it is the primary responsibility of the petitioner to see that the class meetings are p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y defence objection that once directions were issued by Y.B. Bhatt, J. in Co. Application No. 892/93, and once the meeting is held in compliance of such directions, the objection on the ground that a particular class of shareholders constitute a distinct and separate class and that a separate meeting should be convened cannot be accepted. The objection to a particular class, having distinct and separate interest, having been wrongly included in a common meeting or separate meeting of such a class was not required to be held justified and could be taken only when petition is filed for sanction or approval of the court to such a scheme or arrangement, and therefore, if objection taken by Miheer on the ground that separate class meeting is not convened is to be upheld, he cannot be non-suited or his objection cannot be overruled solely on the ground that Y.B. Bhatt, J. has ordered one common meeting of equity shareholders of the MIL. This preliminary defence must therefore fail, and is hereby rejected. 146. Having disposed of the aforesaid preliminary defence, this court is required to consider as to whether the aforesaid three classes set out in sub-paras (A), (B) and (C) hereinabov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to consider the persons who must be summoned to it, and who are to be dealt with as different classes; that is, we must consider the state of affairs at the date of the meeting, for the persons to attend it are those who have a right to attend it at that time, and it is that state of affairs, and not the position of things at the date of the original contract, that we must look at. The Act says that the persons to be summoned to the meeting (all of whom, be it said in passing, are creditors) are persons who can be divided into different classes - classes which the Act of Parliament recognises, though it does not define them. This, therefore, must be done: they must be divided into different classes. What is the reason for such a course? It is because the creditors composing the different class have different interests; and, therefore, if we find a different state of facts existing among different creditors which may differently affect their minds and their judgment, they must be divided into different classes. "[Emphasis supplied] 148. From the aforesaid quotation it becomes clear that if different state of facts exist qua different creditors or shareholders which differently af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n meeting of such persons will not provide a common meeting place for consultation for common interest. Persons with such different or diametrically opposite interest may not constitute one class though in wider classification they may fall in the category of either creditors or shareholders. If common meeting of persons having dissimilar or diametrically opposite interests or conflict ing interest may in a given case results into injustice to a smaller class, sanction must be withheld. 150. In this connection, we may notice the decision in Holders Investment Trust Ltd. 1971 (Ch.D) 583. Before Megarry, J. the petitioner-company sought confirmation or sanction to the reduction of company's capital. The company's petition for confirmation was opposed by minority preference shareholders. The majority preference shareholders support ing the reduction were also holders of 52% of company's ordinary stock and non voting ordinary shares. The court was approached by asking a question: Whether the majority preference shareholders shall act in the interest of class as a whole in voting for the reduction of capital so that an effectual sanction had been given to the modification of class righ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, namely, outside shareholders, i.e., to say the shareholders other than MIT and secondly MIT, a subsidiary of Hambros. The contention was that MIT were a separate class and should have been excluded from the meeting of outside shareholders. While dealing with the aforesaid objection Templeman, J. referred to and relied upon oft- quoted observations of Lord Esher, M.R. and Bowen, L.J. in the case of Sovereign Life Assurance Co. (supra) . Having quoted the said observations (which are already quoted hereinabove) the court came to the conclusion that in the facts of the case a separate meeting was necessary. Objection was accepted and it was held to be fatal. 154. In the context of the facts of that case the court then proceeded to consider one another objection, namely, that if the scheme were sanc-tioned by the court, the objectors, namely, the National Bank of Greece would be liable to pay capital gains tax in Greece. In this context, the court considered the effect of section 209 of the Companies Act, 1948 which is more or less similar to section 395 of our Act. It was noticed that section 209 provides safeguards for minority shareholders in the event of take over bid and in p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ders and not to individuals. To such a contention, Templeman, J. replied by following observations : "In a good many cases so it would be, but in the present case it seems to me that the individual loss which the objectors will suffer from the scheme is one which should be borne in mind." 156. The aforesaid observations and the final order passed by Templeman, J. in this decision are pressed into service by Mr. M.J. Thakore, Ld. counsel appearing for Miheer to contend that separate meeting of Miheer and the members of his branch ought to have been called as their interest as equity shareholders was quite distinct, separate and conflicting to the interest of the rest of the shareholders. In his submission, the family history, the devolution of share in the family business and family arrangement of 1979 cumulatively go to establish that interest of Miheer and members of his family and his branch was conflicting with the interest of ANM group, YNM group and RNM group. He submitted that had a separate meeting of that class been convened, he could have put forth his objections to the proposed scheme of amalgamation and could have pointed out objections and reasons for which the propos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The group styled as a class should ordinarily be homogeneous and must have commonality of interest and the compromise offered to them must be identical. This will provide rational indicia for determining the peripheral boundaries of classification. The test as stated earlier would be that a class must be confined to those persons whose rights are not so similar as to make it impossible for them to consult together with a view to their common interest." (p. 873) 158. It is in the light of the position of law as summed up hereinabove, that this court is called upon to answer the objection as to whether the aforesaid three groups at (a) , (b) & (c) constitute "separate class" requiring separate and differential treatment to each when contrasted with larger class of equity shareholders of MIL. If answer to any of the three groups is in the affirmative, omission to call a separate meeting of that particular group or exclusion of that particular group from the group of equity shareholders on 22-1-1994 would be fatal to the ultimate resolution passed. On the other hand, if I find that any of the three groups does not possess or represent a separate, distinct or conflicting interest to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s assumed to be dissimilar which is not arising from any legal right they do not deserve any separate treatment as separate class. 160. In Gore-Browne on Companies (44 Edn.) at para 30 under sub heading 14.1 while examining the relationship between sections 425 and 428 (comparable to our sections 391 and 395), the author has noted that in Hellenic & General Trust Ltd. 's case (supra) a minority shareholder complained that the effect of a scheme under section 425 amounted to a compulsory purchase of its shares and that, since it owned more than 10% of the shares affected, it could resist compulsory acquisition under section 428, and its rights under that section were being evaded under the scheme. Templeman, J. accepted this contention and refused to make an order approving the scheme under section 425, even though he found the scheme was 'fair or more than fair to the ordinary shareholders as a class'. He relied upon two decisions on the relationship between sections 425 and 582. Those cases have already been discussed at 30.7 where it was seen that they were open to criticism so far as they hold that a scheme, which could not be brought under section 582 anyway, will not be confi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is therefore no requirement of nine-tenths majority for a scheme under section 425 which is akin to a scheme under section 428. But the court refused to sanction the scheme, even though it was fair to the ordinary shareholders as a class, and the dissenter who owned 13.95% of the shares, objected for personal fiscal reasons. The court would not allow section 425 to be used to deprive the dissenter of his property, which he could lawfully retain under section 428 without a 'very high standard or proof from the applicant. This had not been discharged, principally because the majority accepting shareholder was a wholly owned subsidiary of the purchaser. It thus becomes clear that according to Palmer also the distinction made in Hellenic & General Trust Ltd. is mainly because the scheme was regarded as one in the nature of take over bid under section 428 equal to old section 209 of English statute. 163. Grower in his Principles of Modern Company Law (Fifth Edition) at page 697 while dealing with this very decision has in the foot-note observed that although the scheme was eminently fair to shareholders generally it was not fair to compel those shareholders who did not want to sell t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Article 22 provides that the issuance of certificates or renewal of shares, or duplicate shares shall be governed by the provisions of section 84 of the Act. Article 23 provides as to how certificates of shares shall be issued and as to how the members of the company can transfer such share certificates. The entire procedure for transfer and transaction of shares and debentures is stipulated under Articles 48 to 61. From the aforesaid provisions dealing with the issuance of shares, class of shares, etc., do not justify any further classification except one between equity shareholders and preferential shareholders. 167. At this stage reference may also be made to the provisions of the Act, namely, sections 82 to 87. Part VI of the Companies Act deals with "Share Capital and Debentures". Section 82 provides that the shares and interests of the members of a company shall be movable property and can be transferred in the manner provided in the Articles of the Company. Section 84 provides for issuance of share certificates specifying number of shares held by any member which shall be the prima facie evidence of the title of a member to such shares. Section 85 deals with two kinds of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heme of amalgamation, in my opinion, that the general principle propounded by Megarry, J. in Holders Investment Trust Ltd. 's case (supra) that the power conferred on a majority of a class must be exercised for the purpose of benefiting the class as a whole and not merely individual members only shall have to be kept in mind. Similarly, in Grierson, Oldham & Adams Ltd., it was held that the test was one of fairness to the body of shareholders and not to individuals. Secondly, in the context of class meeting when an objection is taken on the ground that a group of shareholders constitute separate and distinct class, requiring calling of separate meeting of such class, the test applied by D.A. Desai, J (as His Lordship then was) in Maneckchowk & Ahmedabad Mfg. Co. Ltd.'s case (supra) , namely, "how the interests of these shareholders is different from the other shareholders?" is required to be applied. In the present case in view of the provisions of Articles of Association as well as the provisions of Companies Act and Rules there is no justification for holding that a group of shareholders which is described as minority shareholders or MHM group constitute a separate and distinct c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uswami Naidu filed suit for declaration and for permanent injunction restraining defendant Nos. 4 to 6 from applying for registering said shares in their names. It was in this context that the Supreme Court examined various provisions of the Companies Act and Rules. In this context the Supreme Court held that whether under the Companies Act or Transfer of Properties Act, the shares are transferable like any other movable property. Only restriction on the transfer of shares of the Company can be as laid down in its Articles of Association, if any. The restriction which is not specified in the Articles is, therefore, not binding either on the company or on the shareholders. After referring to various decisions and observations of the Learned authors on the Company Law ultimately in its para 9 of the judgment the Supreme Court concluded as under : "9. Hence, the private agreement which is relied upon by the plaintiffs whereunder there is a restriction on a living member to transfer his shareholding only to the branch of family to which he belongs in terms imposes two restrictions which are not stipulated in the Article. Firstly, it imposes a restriction on a living member to transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r omission that such agreement is not made part and parcel of Articles of Association. Neither Miheer, any member of his family nor any of his trusts has moved at any stage for appropriately amending the Articles of Association of the MIL. Legally, therefore, it is not possible to permit Miheer to regard himself and the members of his family as a separate and distinct class of equity shareholders from the rest of the equity shareholders of the MIL. 173. Even factually, it is required to be noted that according to Miheer in the year 1979 his group was holding approximately 16.15% of shares of the MIL which gradually came to be reduced to 5%. As a group it was not a group of majority shareholders and was not possessing any special right or treatment. Amongst the class of equity shareholders it is not possible to classify group of Miheer and members of his family as a distinct and separate group entitled to a separate class meeting. As 5% shareholders of total share capital of MIL, the group of Miheer and members of his family could have objected to proposed scheme. Their separate meeting, in my opinion, would not have made any difference as even otherwise in the absence of that grou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring this court to the objection of Groups "B" and "C" which is put as composite objection No. VII. Group "B" 175. In Group "B" would fall the shareholders who applied or/and were allotted shares of the MIL pursuant to Rights Issue of 1987 and Rights Issue of 1992. It is submitted that the Rights Issue of 1987 was subject matter of challenge at the instance of three shareholders who instituted two civil suits being Civil Suit Nos. 3181 and 3182 of 1987 in the City Civil Court at Ahmedabad and the Rights Issue of 1992 was also the subject matter of challenge in the Suit being Civil Suit No. 5189/92 instituted by Miheer himself in the City Civil Court at Ahmedabad. 176. Turning now to the Rights Issue of 1987, it opened on 4-5-1987 and closed on 3-7-1987. The same was challenged by three shareholders in two separate suits above referred. The said shareholders have taken out Notice of Motion for temporary injunction restraining the MIL from issuing right shares. Said Notice of Motion was rejected by the City Civil Court at Ahmedabad mainly on the ground that the suits were belatedly filed on 27th June, 1987 only a few days before the closure of Rights Issue and therefore the balanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the aforesaid order of the learned City Civil Judge, Miheer has submitted that the rights of shareholders to whom rights shares were allotted in 1987 Rights Issue were under cloud as they were expressly subject to the outcome of the two suits instituted by the shareholders in the City Civil Court at Ahmedabad. It is, therefore, submitted that the allottees of these shares or their transferees could not have participated in the meeting of equity shareholders and the resolution which was passed after participation of such equity shareholders was, therefore, bad and the scheme, therefore, cannot be sanctioned. 179. In reply to the aforesaid objection, the petitioner-company has pointed out in its affidavit-in-rejoinder the need of issuance of Rights Issue of 1987. It is, thereafter, pointed out various factors to submit that in fact allottees of shares in response to their applications for Rights Issue of 1987 could not be treated as a class by themselves and could not be denied the status of equity shareholders. Firstly, it is pointed out that the learned City Civil Judge has not, in fact, granted injunction against allotment of shares to the applicants. Once such shares are allot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es were allotted to them. On allotment of such issues they have not become a class distinct or separate from the equity shareholders more so that even right to transfer their right shares to any other person is not in anyway restricted. Such shareholder being not under any disability or disqualification and being even otherwise holders of equity shares were entitled to participate, attend and vote at the meeting of equity shareholders. In the absence of any disqualification disentitling them to vote, simply because the litigation is pending in the court, they cannot be treated as a separate and distinct class. Eighthly, it is submitted that it is also not pointed out by Miheer as to how these shareholders constitute a separate and distinct class whose interest is in no way separate and distinct from the interest of entire class of equity shareholders. Mere institution of suit would not reduce them to a less qualified class of equity shareholders. Lastly, it is submitted that the plaintiffs of those suits being the stooges of Miheer they have subsequently taken no interest in the litigation, and despite directions of the City Civil Court to decide said suits expeditiously in Novembe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh may not be important in the context of deciding the point of class meetings is mentioned only to reflect upon the conduct of the objector. It is, therefore, not possible for this court to hold that the allottees of Rights Issue of 1992 and/or their transferees were under any disability or disqualification so as to render themselves as a separate and distinct class from the general class of equity shareholders. In the absence of any prohibitive order by the City Civil Court when transfer of such Rights share is also permitted by allottee to another person one fails to understand as to how in suit of this nature, any detriment or prejudicial relief could be granted to the class of equity shareholders to whom the Rights shares were allotted in 1992.1, therefore, do not find any substance in this objection and same is overruled. Group V" 181. In Group "C" of his objection No. VII, Miheer has inter alia contended that in the Rights Issue of 1987 in view of the prohibitive order issued by the City Civil Court at Ahmedabad, no shares could have been issued in favour of NOCIL and Sushrupada Investments Pvt. Ltd. The allotment of shares to NOCIL and Sushrupada was illegal and in contra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inted out that Sushrupada Investments Pvt. Ltd. had 563 shares in the MIL and was therefore entitled to just 563 shares of Right Issue. However, the said company has been allotted shares to the tune of 42,500 which again were issued from out of the unsubscribed portion of Right Issue and that was also in total disregard of prohibitory order of the City Civil Court. 183. To this objection, there is three-fold defence from the Company. The first defence is that the allotment of shares to NOCIL or Sushrupada is not from any unsubscribed portion of the Right Issue. In this connection it is pointed out in the affidavit-in-rejoinder that the subscription in the Right Issue was 70% only and therefore 30% would remain as unsubscribed. It is pointed out that from this 30% unsubscribed portion no shares are allotted either to NOCIL or to Sushrupada. The second defence is that even if it is assumed that the allotment of shares to NOCIL and Sushrupada was in breach of order of injunction issued by the City Civil Court such allotment would not be invalid. At the most, the consequence would be one arising from the breach of order of the court, namely, liability for contempt. It was pointed out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f by the Board of Directors in such a manner as they think most beneficial to the company under clause (d) of section 81(1) of the Act. The power of the Board to dispose of such surplus shares is very wide and the Board can dispose of such surplus shares to non-members as well. Law imposes no time limit for receipt by the Board of subscription for surplus shares which it can dispose of under section 81 (1)(d ). Even before the availability of extent of such shares can be ascertained or is known, for facility of procedure and the expeditious disposal, the shareholders are invited simultaneously to apply or subscribe for additional shares by the very letter of offer by which they are entitled to subscribe to their rights entitlement. Just as a shareholder can in advance subscribe for allotment of additional shares disposable under section 81(1)(d) of the Act, it is submitted that a non-member can also apply. It is the further case of the company that the shares allotted under section 81(1)(d) to non-members are not additional shares but the shares in respect of which the existing shareholders have not exercised their right of pre-emption contemplated in section 81(1). 185. From the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such notice is given that he declines to accept the shares offered, the Board of Directors may dispose of them in such manner as they think most beneficial to the company. In view of the aforesaid provisions admittedly the case of NOCIL cannot fall under clauses (a) & ( b). It is the case of the company that it has under clause (a) offered shares or allotted the shares to NOCIL as well as to Sushrupada. The gist of defence is that what is allotted to Sushrupada and NOCIL is not from unsubscribed portion of right issue but is from out of additional shares. Such subscription is under clause (d) of section 81(1). Subscrip- tion under this head was received from NOCIL, a non-member, even prior to the issuance of prohibitive order of the City Civil Court. It is the case of the company that before the City Civil Court when it was disclosed that 70% have subscribed to the right issue, it wanted to convey the subscription by members as well as non-members. It is submitted that the right of non-members flowing from section 81(1)(d) cannot be ignored and therefore consistent with the right conferred upon the Board of Directors if shares are allotted under section 81(1)(d) it cannot be said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... received legal advice that it was not prevented or restrained by any interim order of the trial court or even by law from allotting to NOCIL the shares allotted to it. 188. From the aforesaid objection and the nature of defence this court is called upon to decide as to whether allotment of shares to NOCIL and Sushrupada can be said to be out of unsubscribed portion of the issue and as a result therefore could it be said to be in breach of prohibitive order of injunction issued by the City Civil Court, and thirdly, if answer to second question is in the affirmative, what is the effect on the rights of such shareholders. It is true that section 81 of the Companies Act principally deals with further issue capital to the persons who are the holders of equity shares of the company on the date of offer. It, therefore, refers to offer to equity shareholders. Such shareholders have right to accept the offer in its entirety. He has also right to partially accept the offer and while rejecting the offer partially he has right to renounce the offer in favour of another person whereupon such renouncee would become entitled to allotment of shares. It is, therefore, clear that the shares allotte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of section 81(1)(d) regards allotment to NOCIL as falling in subscribed portion of the issue, it cannot be said that what was allotted to NOCIL was from the sub scribed portion of the issue. 191. The question as to whether the Board of Directors could issue additional shares to non-members in exercise of their power under section 81(1)(d) of the said Act in view of prohibitive order of the City Civil Court is a moot question. In my opinion, the shares which are subscribed in acceptance of the offer made by the Company either by the shareholders themselves or by persons in whose favour they have renounced their right (renouncee) constitute class of subscribed shareholders, i.e., the shares which are not at all subscribed would constitute unsubscribed portion thereof. It is undoubtedly true that under section 81(1)(d) the Board of Directors has discretion to dispose of such shares for which offerees have declined. The language of clause (d) itself makes it abundantly clear that it is referable to that portion of capital which is not subscribed. Therefore, I do not accept the defence of the company that the shares allotted to NOCIL and Sushrupada are from the subscribed portion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany in issuing shares to NOCIL and Sushrupada from unsubscribed portion of Rights Issue is held to be in contravention of the order of temporary injunction granted by City Civil Court, the action of allotment itself would not become illegal or null and void nor would the allottees be deprived of their right flowing from such an allotment. In order to make good this submission, Mr. Vakil has invited the attention of this court a large number of decisions of various High Courts. The first case in point of time which is all throughout followed is that of Beliram & Bros. v. Ram Lal AIR 1925 Lahore 644(2) where the Division Bench was called upon to decide the effect of transfer of a house when a temporary injunction was granted restraining defendants from transferring a house. Such injunction was granted on 2-2-1915. On 28-10-1918 the defendants sold the house to defendant No. 4. Plaintiff brought a suit for declaration that the suit house was still the property of original defendants 2 & 3 against whom order of injunction was granted. It was in this context that the Division Bench of Lahore High Court made distinction between order of injunction and order of attachment of property. Wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should not also be further protected by an order of injunction restraining the other party from alienating the property. The Division Bench noted that the person obtaining an order of injunction has got some additional advantage of prosecuting the offender and also getting his properties attached and sold as provided by Order 39, Rule 2A of C.P. Code. This would work out a deterrent for his indulging in the act of violation of the order of injunction. The order of injunction does not, in any way, militate against the right, title and interest of the offender in the property in question like an order of attachment of property which makes the property in custodia legis. The order of restraint does not in that way deprive or suspend any right of a person but only aims at a prohibition to act in a particular manner. 194. Similar view is taken by the Allahabad High Court in the case of Balbhaddar v. Balk AIR 1930 All. 387 (2) where the Ld. single judge of Allahabad High Court held that as and when breach of order of injunction was committed the remedy is to apply under rule 2(3) of Order 39. Existence of temporary injunction does not render alienation made in contravention of injunct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should be discouraged as large number of persons may be put to detriment by corporate body by resorting to blatant breach or contravention of the order of the court. 197. A company court, in my opinion, should be slow to uphold such a defence coming forth from a corporate body and I would therefore not accept even the second defence of the petitioner-company. 198. In my opinion, objection raised by Mr. M. J. Thakore, Ld. advocate for Miheer is well-founded. The petitioner-company which was injuncted by prohibitory order of City Civil Court is estopped from contending that even if it has committed breach of order of the Court, only remedy is an action for civil contempt and that the allottees of the shares can legitimately participate in the meeting of equity shareholders. A party which is injuncted by the order of injunction cannot be permitted to contend that it having violated injunction, nothing further could be done or no relief could be granted by the court. Such stand coming from a corporate body shall have to be discouraged both with a view to encouraging reverence and regards for the orders of the court and for discouraging the attitude of no respect for the orders of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e workers of the company who would be preferential creditors have been grouped together with the other unsecured creditors. The grouping of workers of the company with the unsecured creditors was found to be beneficial. It was noticed that in respect of workers different compromise was offered while to remaining unsecured creditors different compromise was offered. In every sense, therefore, it was found that they constituted two distinct and separate classes. The Court also noticed that if the meeting is not properly convened scheme approved at such meeting cannot be sanctioned. However, from the report of the Chairman, the Ld. single judge found out the number of preferential creditors who attended the meeting of unsecured creditors and what was the number and value of their votes. Having ascertained the number of preferential creditors who attended the meeting of unsecured creditors they were separated from the number of and value of votes of remaining unsecured creditors and then the court proceeded to examine the result of voting as if two separate meetings were called. The Ld. single judge, thereupon, instead of remitting the scheme to separate meetings of unsecured and prefe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the meeting. Since Arvind Mafatlal was interested in getting the scheme approved and sanctioned, he was having a personal interest in the scheme and he was, therefore, not qualified to chair the meeting and at the same time to obtain proxies from shareholders to vote in favour of the scheme. 203. The aforesaid objection shall have to be examined in the context of the relevant rules. Rule 67 of the Companies (Court) Rules, 1959 requires an applicant to take out summons for directions to convene a meeting of creditors and/or shareholders or any class of them. Ordinarily, the summons is to be moved ex parte. Rule 69 of the said rules inter alia provides as to what directions the court can issue at hearing of summons. The power of the company judge upon hearing of such summons include power to give such directions as he may think necessary in respect of matters provided in clauses 1 to 7 of Rule 69 and Rule 69(3) empowers him to issue directions appointing a Chairman for the meeting to be held. It appears that in the company application which was filed under Rule 67 being Company Application No. 872 of 1993, Y.B. Bhatt, J. issued directions under Rule 69 which included directions to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ho intended to participate in the discussion or deliberation. It is also not alleged that the Chairman of the meeting was not in a position to control the meeting or to maintain law and order situation in the meeting. It is also not alleged that due to uproar or commotion or unruly scene, no conscientious decision was reached. It is also not stated that as Chairman of the meeting, he gave wrong reply or erroneous decision or ruling. It is also not averred that he took advantage of his Office as Chairman of MIL to unduly influence the voting. He has also not explained as to why he immediately did not move the court for the modification of the order of the Court. He has also not stated as to why he did not object to Arvind Mafatlal being the Chairman of the meeting of the equity shareholders of MIL held on 22nd January, 1994. He has also not given any reason as to why he did not register his protest or objection in writing or even orally at any point of time prior to or during the course of the meeting of equity shareholders of 22nd January, 1994. Miheer has taken this objection for the first time before this Court in the affidavit filed by him objecting to the proposed Scheme of Ama ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Chairman is derived from the meeting itself. Those present at the meeting have therefore right to raise objections to any person occupying the Chair. Those who have raised no objection to his occupying the Chair under a rule or regulation governing the appointment of a Chairman or who have even failed to raise objection at the meeting cannot be permitted to raise such objection after the meeting is successfully conducted and the will of the shareholders is lawfully ascertained. 208. In view of failure of Miheer to raise objection to the appointment of Arvind N. Mafatlal as Chairman at the earliest possible opportunity, on receipt of the notice of meeting on 22nd January, 1994 coupled with his failure to get the order of the High Court appointing Arvind N. Mafatlal as Chairman of the Meeting duly modified and also in view of his failure to object to Arvind N. Mafatlal being the Chairman of the meeting actually at the time of the meeting either by personally remaining present or by sending his representative, in my opinion, would disentitle him from raising such objection, which in the facts and circumstances of the case, is found to be merely procedural and not substantial. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ally or has influenced the shareholders present and voting or has done any overt act or omitted to do any act expected of him which would influence the mind of shareholders adversely. Miheer also does not specify for what personal interest Arvind N. Mafatlal could not have chaired the meeting. Mere fact that he was the Managing Director or Member of the Board of Directors which resolved to amalgamate the two companies is not disqualified Arvind N. Mafatlal from acting as Chairman of the meeting. Similarly, in absence of attribution of overt acts on part of Arvind N. Mafatlal as Chairman of the meeting to anyhow push through the proposed Scheme by means fair and foul, it would not be permissible for this Court to hold that he was disqualified to act as Chairman of the Meeting. No overzealousness or unnecessary enforcement is attributed to Arvind N. Mafatlal as Chairman of the meeting to anyhow push through the proposed Scheme of Amalgamation. It cannot, therefore, be said that he was disqualified to act as Chairman simply because he was desirous of the proposed scheme being approved by the meeting. The functions of the Chairman, as seen hereinabove, are to preside over the meeting, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der, hi the facts and circumstances of this case, not on the ground of any precedent, but on my findings reached hereinabove, I am satisfied that appointment of Arvind N. Mafatlal as Chairman of the meeting has not in any way adversely or prejudicially affected the majority decision of the shareholders nor is any foundation laid for successfully submitting that the minds of the equity shareholders present and voting at the meeting were prejudicially or adversely influenced or affected by the presence of Arvind N. Mafatlal. Objection No. VI: Non-disclosure of material facts 212. From the text of the objections, as set-out hereinabove, the objection is to the effect that all relevant material facts relating to MIL (transferee- company) and M.F. (transferor-company) were not placed before the shareholders either by incorporating them in the scheme of amalgam ation or with explanatory statement annexed thereto. The shareholders, therefore, were not in a position to exercise an intelligent judgment as to whether they should vote in favour of the scheme or against it. Therefore, the meeting and the resolution passed therein are of no effect, and the Court should not sanction the scheme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding in particular the nature of the concern or interest, if any, therein of every director. The object of this section is that the shareholders must know all the material facts and interests of the managerial personnel in each item of business so that they may not be duped by the management and may not be persuaded to act in the manner desired by the management. Where the notice or Explanatory Statement does not disclose all material facts, the resolution would be invalid. It is hardly necessary to emphasize that notice which is not accompanied by proper explanatory statement would defeat the very purpose for which the statement is prescribed by law. The courts of law have, therefore, deprecated practice of incorporating a statement in the notice that inspection of the material documents will be offered at the registered office of the company. The reason assigned is that a large body of shareholders may be residing at places far away from the registered office of the company. This provision is therefore held to be mandatory and non-compliance thereof shall result into invalidation of the resolution passed at the meeting. 217. According to Miheer, following material facts ought to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of amalgamation circulated amongst shareholders contains no details of the balance sheet of M.F. which is to be amalgamated. In absence of such materials shareholders could not arrive at intelligent decision. (v)The company has also not disclosed the fact that compared to the investments made by MIL in shares and stocks, the investments made by MF in shares and stocks has not appreciated. In fixation of Fair Exchange Ratio since book value of investments in shares and stocks is relied upon this disclosure is essential. 218. In the affidavit-in-rejoinder filed by R.R. Patel, the Company Secretary of the petitioner-company it is pointed out that proviso to section 391(2) and section 393 operate at different stages. It is further pointed out that the annual report of the company for the year ending 31st March, 1993 was filed in the court along with the company application. It is further case of the company that pendency of Civil Suit No. 1010/87 in the Bombay High Court or the counter-claim filed by Miheer in such suit do not constitute material facts relating to the MIL. It is also further pointed out that pendency of Civil Suit Nos. 3181&3182ofl987 filed by two shareholders again ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arithmetics subsequently. It is thus clear that every non-disclosure cannot be fatal, and unless it is fraudulent and has prejudicial effect on the decision making process of the members, the decision cannot be set aside or voided. 221. In the case of Kalinga Tubes Ltd v. Shantiprasad AIR 1963 Ori. 189 in the context of explanatory statement under section 173, the Division Bench of Orissa High Court took the view that even if it is assumed that some facts which were material to the notice had been omitted from it, further question that would arise for consideration is whether the mere omission of such facts would invalidate the notice or resolution passed in the meeting convened by the said notice. The Court found that if any such objections would have been taken to the notice, the Chairman might have accepted the same and taken steps to call fresh meeting in accordance with the provisions of law. The Court found that in the case before it the person not only did not object but permitted the meeting to proceed. In this context, the Court found that it is well-settled that where the shareholder by his conduct shows that he knew the real facts of work to be transacted at a meeting, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the meeting are before the shareholders and they also know what is the nature of the concern or interest of the management in such item of business, the idea being that the shareholders may not be duped by the management and may not be persuaded to act in the manner desired by the management unless they have formed their own judgment on the question after being placed in full possession of all material facts and apprised of the interest of the management in any particular action being taken. Having regard to the whole purpose and scope of the provision enacted in section 173,1 am of the opinion that it is mandatory and not directory and that any disobedience to its requirements must lead to nullification of the action taken." (p. 841) 223. In Maneckchowk & Ahmedabad Mfg. Co. Ltd (supra ) , D. A. Desai, J., (as His Lordship then was) was called upon to decide a contention as to by whom statement under section 393 should be signed, and further contention that the effect of the scheme on the material interest of Directors and Managing Directors has not been clearly set out in the statement, and while negating the objection His Lordship made following pertinent observations: "The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h "a meeting of creditors or any class of creditors or members or any class of members called under section 391". The provisions of section 393 take their colour from section 391 which contemplates convening of meeting under the directions of a court, "of creditors or class of creditors or of the members or class of members, as the case may be". Sections 391 and 393 are a complete code in themselves in respect of the provisions or procedure relating to sponsoring of the scheme, the approval thereof by the creditors or the members, as the case may be, and the sanction thereof by the Court. In this connection, the Court observed as under: "... A combined reading of sections 391 and 393 and its comparison with the provisions of section 173 shows that the former section deals with a specific situation to the exclusion of the general provisions made by section 173. Furthermore, section 173 postulates a meeting of a company whereas sections 391 and 393 contemplate convening of a meeting of members or a class of members. It is true that any meeting of a company is factually also a meeting of the members of that company but the thrust of the two sets of sections clearly establishes a diff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted therein. It is not disputed before me that the statement accompanying the notice convening meetings of the members in the present case did disclose the terms of the compromise or the effects of the said terms. The argument, however, is that in so far as it was not disclosed that there were common directors on the boards of the two companies, there was a non-disclosure within the meaning of 4th limb of clause (a) of sub-section (1) of section 393 mentioned above. This, in my opinion, is a misconception. The disclosure contemplated by the said limb relates only to the effect on the interest of the directors etc., of the scheme insofar as such effect is different from the effect on the like interest of the other persons. I am unable to appreciate as to what effect can there be of the scheme on the common directors of the two companies or much more how would such effect be different from the effect on the like interest of other persons, assuming without deciding that interests of the directors are to the disclosed. Even so, there would be no breach of the provisions. Interests of directors is an expression which has well defined connotation. The term 'interest' relates to the inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d have been taken at the earliest possible opportunity or at least in the meeting which was duly held. Secondly, the notice and the explanatory statements were not found to be defective. It was also found that they were in substantial compliance with the statutory provisions. The Court also pointed out the distinction between the explanatory statement under section 173 and section 393 of the Companies Act. 227. In Suri & Nayar Ltd., In re [1983] 54 Comp. Cas. 868 , the Id. single Judge of Karnataka High Court examined the question of court's power to investigate into the bona fides of the statement under section 393 and observed that unless per se fraudulent intention could be gathered from the statement under section 393, the Court will not investigate into the bona fides of statement required to be made under section 393(1) of the Act. The court found that if the facts stated in the statement were otherwise true, one possibly could not object to statement resulting in bias against the scheme of amalgamation. In my opinion, the statement of law made by the Ld. single Judge of Karnataka High Court on the scope of statement under section 393 is rather too wide. Even if the facts st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t which has got to be explained which would arise on account of the approval of the scheme. If something is implied in the scheme, which is not obvious, the same must be brought to the notice of the shareholders...." (p. 214) The Division Bench further observed as under : "The dictionary meaning of word 'effect' so far as it is relevant for our purpose given in The Random House Dictionary of the English Language is as follows........'result, consequence'... 'effect' means 'consequence(s )'; result: This refers to something produced by action or cause. In other words, the effect is that which is produced and as observed by Miabhoy, J., the condition which arises as a result of certain cause of action. The aforesaid clause (a) of section 393(1) does not lay down as to the effect on what has got to be explained in the statement. When it speaks of explaining the scheme's effect, consequence or result which would have the scheme. The requirement is to state and explain the effect in detail, or purpose or consequence or result. In other words, the basis of working on which certain consequences or result of the scheme would flow from the scheme is not required to be stated. It is only t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the nature of the concern or interest, if any, therein, every Director and the Manager, if any. Under the proviso, if such item of special business affects any other company, and if any Director or Manager holds 20% or more of the paid-up share capi- tal of that other company then that should be mentioned. If approval of the meeting is necessary to any 4. Section 393(2) requires that the statement contemplated thereby should (r) set out the terms of the compromise or arrangement, (ii) explain the effect of the terms of such compromise or arrangement, (in) in particular state the material interests of the Directors, Manag- ing Director or Manager of the com- pany, and (iv) effects on these inter- ests of the compromise or arrange- ment, if any, and in so far as it is different from the effect on the like interests of other persons. document, then explanatory state- ment will also mention time and place where document can be inspected. This clause thus requires disclosure of all material facts. 5. Section is general in nature which requires a statement setting out all material facts concerning each spe- cial item of business. The notice which is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... closure of all material facts concerning special item of business. Therefore, such statement should only comply with the statutory requirement of section 393(1)(a). Various details of litigations between Arvind Mafatlal on one hand and his brothers and Miheer on the other hand would not fall under any of the stipulations of section 393(1)(a ). It may be noticed at this stage that the C.S. No. 1010/87 pending in the Bombay High Court is a suit filed by Arvind Mafatlal against his brothers and Miheer for specific performance of allegedly concluded agreement. In such suit neither MIL nor MF is a party. In such suit, Miheer has filed his counter-claim for specific performance of family arrangement alleged to have been reached amongst the family members in 1979. Details of such suit are matters of for concerned parties to the proceedings and not to the entire class of shareholders. Neither the alleged family arrangement of 1979 nor allegedly concluded agreement of 1985 between Arvind Mafatlal, his two brothers and Miheer are incorporated in the Articles of Association of the company or companies by appropriate amendments thereof. The alleged family arrangement of 1979 or allegedly concl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e allottees of Right Issue of 1987 constitute separate class or were required to be separately consulted. In my opinion, therefore, non-disclosure of pendency of such litigation is of no consequence. As regards, third suit filed by Miheer in the City Civil Court at Ahmedabad against Right Issue of 1992 it must be stated that the Learned Chamber Judge of the City Civil Court has not granted prohibitory injunction with the result that the Right Shares were allotted to the allottees and the capital of the Company stood increased thereby. On the one hand, Miheer has challenged the Right Issue of 1992 and sought to restrain the MIL from allotting shares in the Right Issue and on the other hand during hearing of said Notice of Motion Miheer, his family members, his family trusts, his charity trusts and investment companies renounced their rights to subscribe to the Right Issue to public financial institutions and made huge profit of more than Rs. 2 crores. The fact of pendency of this litigation was specifically known to Miheer and non-disclosure thereof has not in anyway prejudiced him. Disclosure of such facts to the entire class of shareholders was not necessary under section 393(1)(a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... connection, some relevant circumstances are pointed out by the learned single judge reference to which for the purposes of this petition is not necessary, and therefore same is avoided. The learned single Judge thereafter observed that if the court has jurisdiction to refuse to sanction a scheme prepared by company and creditors concerned, it would also have jurisdiction to refuse to give direction to convene a meeting if the circumstances of the case so demand. Section 391(1) is not a sign-post but a check-post whereat it is the duty of the Court to examine the scheme for itself. The obligation on the court is greater because the application is ex parte and it is not practicable to give notice to numerous creditors or members of the company. At this stage, various factors could be examined by the Court and such an examination of various factors enumerated by the learned single judge include the factor as to whether the company is ready with statutory information under proviso to sections 391(2) and 393(1)(a). It has also observed that the Court's role under section 391(1) is no less important than under section 391(2) and the very said role is entrusted to the Court under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of injunction against Right Issue of 1987, the pendency of two civil suits filed in the City Civil Court at Ahmedabad by the shareholders against the Right Issue of 1987 pales into insignificance as it has no bearing, whatsoever, on the issue of amalgamation as well as on the right of equity shareholders to whom the shares were already allotted. Such pendency of litigation simply constitute insignificant history which has no bearing, whatsoever, on the proposed scheme of amalgamation. Similarly, the pendency of civil suit filed by Miheer against the Right Issue of 1992 of the MIL was very much known to Miheer and his group. It is also very much known to all the shareholders to whom the shares were allotted in 1992 as it was stipulated in the order of the City Civil Court itself that such allotment of right shares was subject to the final outcome of the civil suit. Each allottee was, therefore, through covering letter, given to know that the shares were allotted to him/her subject to the final outcome of the civil suit. Such fact which is so widely known to the present objector as well as to the large class of shareholders is not required to be stated in the explanatory statement to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alleged by Miheer that the purpose of fixing, Fair Exchange Ratio, the Scheme of Amalgamation has relied upon the report of M/s C.C. Chokshi & Co. and ICICI. M/s C.C. Chokshi & Company was interested party and it could not have given any report, based on which Exchange Ratio could be fixed. It is pointed out by Miheer that M/s C.C. Chokshi & Co. are not only the Auditors of the company since ageis but the partners thereof, have close relation with Arvind N. Mafatlal being advisors in personal capacity. It is pointed out that even the family arrangement of 1970 was prepared by senior partner of said firm M/s C.C. Chokshi & Co. It is therefore suggested that MIL as well as M.F. ought to have been taken an independent report of any independent Chartered Accountant regarding the Fair Exchange Ratio. 236. In affidavit-in-rejoinder filed by the Company it is denied that C.C. Chokshi & Co. could not have given any report based on which Fair Exchange Ratio is fixed. It is further pointed out that M/s C.C. Chokshi and Company is a very reputed firm of Chartered Accountant in India and its partners are held in high esteem in profession as also in industrial and commercial circles and they ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 75 and has observed as under: "Whether a report or determination lacking final effect may nonetheless as to seriously prejudicial effect on the legally protected interest on individuals (as per example when it is a necessary pre-requisite of a final order) the person making the report or preliminary decision may not be affected by interest or likelihood of bias." In the case of a report or opinion of an expert, in my opinion, it is difficult to hold that it is likelihood to have effect on the interest of individuals. Firstly, the person tendering the report or opinion is not acting in the position of an adjudicator. Therefore, excepting a duty to act fairly the icy impartiality is not expected. Therefore, in the sense in which the doctrine of bias is applied in the Administrative Law, the same s not required to be applied in the context of opinion/report of expert on the subject. 238. With the aforesaid preface in mind, it shall have to be kept in mind that C.C. Chokshi & Co. has been working as Auditor and the Chartered Accountant of both the companies continuously since last number of years. They are, therefore, having complete knowledge of the working of MIL and M.F., their l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting to Rs. 17 crores over and above committed to issue equity warrants to enable ICICI to subscribe for further 1,00,000 ordinary shares of M.F. It is, therefore, alleged that ICICI would like to see that in the proposed Scheme, MF gets itself amalgamated with MIL on the best possible terms. It is alleged that ICICI would therefore try to see that more benefits go to MF and therefore ICICI cannot be said to be an independent party and on its opinion, no reliance could have been placed. In the alternative, it is submitted that opinion of ICICI even otherwise is very vague and cannot form the basis for fixation of Fair Exchange Ratio. 240. The company has in this connection pointed out that ICICI is a very well-known financial institution in India. ICICI prepared project appraisal reports for various companies in which it holds shares or to which it has advanced substantial term loans and they are relied upon by various companies at the time of public issues. ICICI is allowed by SEBI to act as managers to many public issues. It is therefore submitted that ICICI could not be said to be interested in fixing a ratio unfair to any of the two companies because of its shareholding and fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot conducted any evaluation or appraisal of assets or liabilities of the two companies. This type of letter cannot be regarded as an expert opinion and cannot be made the basis for determining the fair exchange ratio. Had fixation of fair exchange ratio been solely dependent upon this report only, this Court would not have accepted the said fair exchange ratio in absence of other considered report from independent expert body. However, in the present case, the company has not placed any reliance upon the said letter of ICICI, but has determined the exchange ratio on the basis of a detailed well considered report of M/s C.C. Chokshi and Co. In fact, the said report is called for by Chairman of M.F. as well as Chairman of MIL. For both these companies, M/s C.C. Chokshi & Company has been working as Chartered Accountants since last several years and it was in know of all details of the working of the two companies, the investment of the companies, the assets and liabilities of the companies, the growth prospect, if any, in each of the two companies. It has after taking into consideration all relevant facts and the gradual progress of the two companies commencing from the inception of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontemporary prospectus offering similar shares for subscription, the capital position of the company, so forth. There may also be an element of value in the fact that the holding of the shares gives control of the company. If the asset is difficult to value, but is nonetheless of the money value, the best valuation possible must be made. Valuation is an art, not an exact science. Mathematical certainty is not demanded, nor indeed is it possible.' 22.1 On a consideration of all these factors and other relevant factors, in our opinion, the fair and equitable basis for amalgamation of "MF" is as under: (i )All these and liabilities of MF as at the close of business on 31st March, 1993 shall vest in and become the assets and liabilities of "MIL", the subsequent operations from 1st April, 1993 being to the account of "MIL". (ii)MIL shall allot to the holders of the Equity share of MF (other than shares of MF held by MIL) as at the date to be fixed by the Board of MIL, on completion of the requisite formalities of amalgamation, 2 (two) equity shares of "MIL" of Rs. 100 each credited as fully paid up for every 5 (five) equity shares of Rs. 100 each of MF. (iii)The 12,06,914 Equity Sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is suggested that the low profit earning ratio per share of MF will as a consequence reduce the profit earning per share of MIL. It is alleged that M/s C.C. Chokshi and Co. has miscalculated earning per share of M.F. at Rs. 14 per share by ignoring the figure of a huge loss incurred during accounting year ending on 31st March, 1990. It is suggested that this is done with a view to giving a rosy picture of M.F. and to misguide the shareholders of MIL. It is suggested that had the loss of year ending 31st March, 1990 been taken into consideration, the Earning Per Share would have been Rs. 7 per share. It is suggested that the ratio of 5 : 2 would have an average earning attributable to those shares at Rs. 35 while the two shares of MIL would be earning Rs. 60. It is therefore suggested that there is clear discrepancy between the existing earning of shareholders of five shares of M.F. and the subsequent earning after the said holder of shares is allotted two shares of MIL in lieu thereof. It is suggested that the higher earning which the shareholders of M.F. would receive would be at the cost of the existing earning of the shareholders of MIL. It is submitted that the Earning Per Shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... work out to Rs. 17 per share. The second objection to the fixation of exchange ratio is on the ground that compared to the investments made by MIL in shares and stocks, the investments made by MF in shares and stocks have hardly appreciated. It is pointed out that market value of investment in stocks and shares as on 31st March, 1993, of MIL is Rs. 168.85 crores as against the cost price thereon of Rs. 39.20 crores. In case of MF, the market value of investment in stock is Rs. 6.63 crores as against the cost price of Rs. 5.36 crores. The grievance of Miheer is that while fixing Fair Exchange Ratio, M/s C.C. Chokshi and Co. had relied upon the book value of the investments in stock and shares and other securities. It is submitted that their exist a wide gap between the book value of investment in stock and shares and other securities as against the market value of investments in stock and shares and other securities. It is pointed out that market value of shares and stocks of MIL is approximately 5 times its cost price while the market value of the investments of MF and cost price thereof is almost identical. The disparity in value of shares and stock and other securities when comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de. He has been a shareholder both of MIL as well as of M.F. and he was director of M.F. at all relevant times. Proposal of amalgamation of M.F. and MIL was on the agenda of the meeting of the Board of M.F. held on 25th November, 1993. The said agenda item made reference to the reports of M/s. C.C. Chokshi & Co., Chartered Accountants, Bombay and ICICI - Securities & Finance Co. Limited with respect to the exchange ratio for the purposes of the Scheme as follows: "Messrs C.C. Chokshi & Company, Chartered Accountants, Bombay were requested to examine and report on the fair and equitable basis for the amalgamation of M. Fine with MIL on the basis of the Balance Sheet as at 31st March, 1993 of both the Companies. They have submitted their report dated 10th November, 1993, and according to the said report, the fair and equitable basis of amalgamation of M. Fine with MIL would be allotment of 2 equity shares of MIL for every 5 equity shares of M. Fine in consideration for transfer of the entire business of M. Fine, together with all assets and liabilities of MIL. Copy of said report is circulated herewith marked as Annexure-H. ICICI Securities & Finance Co. Ltd. have also given their ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... well known methods are applied: (1)The manageable profit basis method (the Earning Per Share Method) (2)The net worth method or the break value method, and (3)The market value method. 254. The principles which emerge from the judicial decisions in the matter of approach to different methods of valuation have been set out succinctly in the book "Valuation of Shares" by Adamson, 5th Edition, at page 667, Chapter 7, dealing with the judicial methods of approach. The said principles are adverted to by learned Single Judge of this Court in the case of Shahibag Entrepreneurs (P.) Ltd., In re [1976] 46 Comp. Cas. 642 . In CWT v. MahadeoJalan [1972] 86 ITR 621 (SC), a question arose before the Supreme Court, whether the appellate Tribunal was justified in law to follow the method involving the principle of "break-up value" instead of method involving the principle of "Yield Value" in determining the value of the shares under section 7 of the Wealth-tax Act. In that context Jaganmohan Reddy, J. speaking for the Court observed as under : "An examination of the various aspects of valuation of shares in a limited company would lead us to the following conclusion : (1)Where the shares in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... will have to be taken into account as will be applicable to the facts of each case. But, one thing is clear, the market value, unless in exceptional circumstances to which we have referred, cannot be determined on the hypothesis that because in a private limited company one holder can bring it into liquidation, it should be valued as on liquidation, by the break-up method. The yield method is the generally applicable method while the break-up method is the one resorted to in exceptional circumstances or where the company is ripe for liquidation but nonetheless is one of the methods." (p. 633) 255. In the aforesaid case, B.K. Mehta, J. has also noticed that when a leading firm of Accountants and Valuers had after taking into consider- ation all relevant factors, suggested the exchange ratio, and when such ratio is not shown to be patently unfair or unjust, the Court shall be slow to set at naught the entire Scheme of Amalgamation. It is also to be kept in mind that valuation of shares is essentially a technical matter, requiring expertise. In the given cases, there can be genuine differences of opinion about the correct valuation of shares. When there are more than one method of v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ospects of the companies, the ratio of distributable earnings to dividends paid during the year, the value of the next assets of the two companies, etc., are factors on which the valuation is often rested. The answer to the question whether some or all of these factors can be applied in the case of a given scheme of amalgamation, depends on the circumstances of each case. It is necessary, however, that the same factors should be taken into account in assessing the two sets of shares." (p. 663) 257. Amalgamation involves exchange of shares. The exchange is by way of allotment of shares of the transferee-company to the shareholders of the transferor-company for their shares ,in the transferor-company. The share exchange ratio is decided by the fair value of shares of the transferor and transferee-companies. The fair value of shares is arrived at after consideration of different modes of valuation and diverse factors. There is no mathematically accurate formula of valuation. An element of guesswork or arbitrariness is involved in valuation. Subject to this, the following methods of valuation are summarised by Datta on the Company Law page 1108. Open Market Price - The hypothetical o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any isolated transaction, receipt of commission for a special service; profits or losses from non-trading investments, capital profit or loss; provision for bad and doubtful debts; adequate depreciation provision; valuation of stock consistent with previous years; deduction of tax at current rates after making all adjustments as in past years. Rate of yield is the return which an investor expects to earn on his investment. It varies with profitability and from industry to industry. 258. Having referred to various permissible methods of valuation of shares as propounded by the experts on the subject and as referred to by various Courts in their respective judicial pronouncements, this Court would now undertake the exercise of referring some detail in the report of M/s C.C. Chokshi & Co. It must be mentioned that report is called for by Chairman of MIL as well as Chairman of MF. For both these companies, M/s C.C. Chokshi & Co. have been working as Chartered Accountants since last several years. From the report, it becomes clear that it has gone through audited statement of accounts and annual reports of the two companies, i.e., M.F. and MIL for five years commenc- ing from 1st of Ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nternational market in the near future by way of issue of Bonds of US $ 100 each, aggregating to US $ 50 million with detachable warrants issued at the rate of 7 warrants for every 10 Bonds. In the case of MF against the paid up capital of Rs. 26.26 crores as at 31st March, 1993, the Company has reserves and surplus of Rs. 40.35 crores. Thus, as at 31st March, 1993, net worth of the Company is Rs. 66.61 crores. It is on this basis that the value per share of MF works out at Rs. 254. It is then referred to the fact that M.F. was required to issue and allot equity shares to the financial institutions and Banks on 1st October, 1993, and 1st October, 1994 and if the said shares are taken into account, the value per Equity Share of Rs. 100 comes to Rs. 221 per share. As against that position of MF, in the case of MIL, paid up capital of Rs. 20.01 crores as at 31st March, 1993, the company has reserves and surplus of Rs. 82.69 crores. The Reserves of MIL are more than four times its paid-up share capital. Thus, on the basis of the Balance Sheet as at 31st March, 1993, the net worth of the MIL is Rs. 102.70 crores, based on which value per Equity Share would work out to Rs. 509 per share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e year ended 31st March, 1993. The profits after depreciation but before taxation of M.F. during the last five years ended on 31st March, 1993 as compared to MIL are stated as under: Year M.F. MIL (Rs. in crores) (Rs. in crores) 1988-89 1.58 1.56 1989-90 4.79 3.65 1990-91 7.39 13.84 1991-92 6.72 14.55 1992-93 2.01 8.26 Average profits of MIL per year after tax on the basis of the working results of the last 5 years works out at Rs. 7.39 crores. On the basis the earning per share of the equity shareholders at Rs. 37 per share. If the Rights Shares issued in 1992-93 were to be considered as fully paid, the earning per share works out at Rs. 27 per share. 260. In para 14.2 of the report, it is noticed that in the case of both M.F. and MIL, there are several factors which need to be considered on account of which the past results may not properly reflect the potential of these companies to earn profits in the future. With respect to M.F., three factors are enumerated in para 14.3. As regards MIL, around 11 factors are set out in para 14.4. Thereafter, in para 14.5, following conclusion is recorded: '14.5 In the light of the above, in the present proposal, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m- ation of the company. The true value of the property in such a situation to its owner necessarily takes account of all the direct and indirect advantages that the property affords its owner. The report further observes in para 16.5 that the market price of an equity share as quoted on a Stock Exchange is normally considered as the fair value of the equity shares of that company where such quotations are arising from the shares being regularly and freely traded in, subject to the element of speculative support that may be in built in the value of the shares. It is further noticed that there could be situations where the value of the share as quoted on the stock market would not be regarded as a proper index of the fair value of the share especially where the market values are fluctuating in a volatile capital market. The report makes reference to the decision of the Supreme Court in the case of Mahadeo Jalan ( supra) where while dealing with shares of quoted companies, the Court observed: ". . . Where shares in a company are brought and sold on the stock exchange and there are no abnormalities affecting the market price, the price at which the shares are changing hands in the or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the shares of one company in terms of the value of the shares of the other company. It is similar to a barter transaction." 265. Having extensively referred to all permissible methods of Valuation of Equity Shares of a company and having examined the various methods for the purpose of fixation of fair, proper and just exchange ratio, the company has ultimately decided to apply one method in preference to another. For not applying another method, namely, method of Valuation of shares at the Market Price quoted at Stock Exchange, M/s C.C. Chokshi & Company has given reasons for ultimately reaching the decision it has rightly concluded as quoted hereinabove. That valuation will have be tampered by the exercise of judicious discretion and judgment taking into account of the relevant factors. Several factors, such as quality and integrity of the management, present and prospective competition, yield of comparable securities and market sentiments etc., which are not evident from the face of the balance sheet, but which will strongly influence the worth of a share are taken into account. The observations of House of Lords in Gold Coast Selection Trust quoted hereinabove are also kept in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he argument that question of valuation and fixation of ratio of exchange was a matter of commercial judgment and that the Court should not sit in judgment over it was negatived and the Court observed that when there is opposition to the fixation of ratio of exchange, the Court not only must go into the question and it is not satisfied about the valuation, it would be justified in refusing sanction to the Scheme. There is enough power in the Court and in such a situation, the Court may even call for report of independent Chartered Accountant. 267. Even keeping the aforesaid observation in mind, on consideration of the report of M/s C.C. Chokshi and Company where Fair Exchange Ratio is fixed on the basis of break-up value, it is not possible for this Court to agree with Miheer that the said Exchange Ratio is unfair or unjust to the shareholders of MIL or that it would result into gradual decrease in their per share income. The submission that the other method, namely, earning per share method could be applied and that by that method proper Exchange Ratio could be worked out is liable to be rejected on the ground that in report of C.C. Chokshi and Company that method is also taken in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany (MIL). Similarly, all debts, liabilities, duties and obligations of transferor-company, on scheme of amalgamation being sanctioned, shall stand transferred to and vested in the transferee-company. In fact, by proposed scheme of amalgamation the properties, movable or immovable, tangible and intangible of transferee-company are not going to be affected. The creditors of the transferee-company are not, in any way, going to be affected by the proposed scheme of amalgamation as the proposed scheme would result into increase of all movable and immovable assets of the transferee-company and it would not in any way result into transferring or vesting any of the properties of MIL to anyone else. As such, by the proposed scheme of amalgamation the class of creditors of the petitioner-company is not going to be affected at all. Under section 391 on an application being made to the Court, the Court passes appropriate order to call, hold and conduct the meeting. Since in a petition for sanction to the scheme of amalgamation the properties of the transferee-company are not to be adversely affected and since they are available to the class of creditors, ordinarily, their meeting is not re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dispensed with the meeting of creditors of the transferee-company. It is also pointed out the under the proposed scheme of amalgamation the properties, rights, claims and powers of MF without further act or deed shall stand transferred to MIL with effect from 1-4-1993. Therefore, the creditors of the transferee-company are not in anyway going to be adversely affected. In view of the aforesaid I do not find any substance in this objection of Miheer. Mr. Thakore has also not made any submission on this objection. I do not find any substance in this objection so as to vitiate the resolution passed by requisite statutory majority approving the scheme of amalgamation. I, therefore, overrule this objection. 270. At this stage it is required to be mentioned that Mr. Darshan M. Parikh, Ld. Advocate tendered before the Court an objection to the proposed scheme of amalgamation allegedly sent by a party, namely, Dinyar R. Contractor and Firozi R. Contractor, vide letters dated 9-3-1994. On enquiry being made from the registry of this Court, it was found that no such communication containing such objection of the party is received by the O.J. Branch of this Court. Technically, therefore, suc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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