TMI Blog2004 (3) TMI 436X X X X Extracts X X X X X X X X Extracts X X X X ..... n No. 25 of 2003 seeks confirmation by the Court to the reduction of the paid up share capital of JPC from Rs. 418,00,00,000 comprising 41,80,00,000 fully paid up equity shares of Rs. 10 each to Rs. 176,21,69,810 consisting of 17,62,16,981 fully paid up equity shares of Rs. 10 each. This reduction is sought consequent upon the sanction of the scheme of amalgamation by Company Petition No. 26 of 2003 under which the shareholders of JPI are to get one share of the amalgamated company in lieu of each share of JPI. An affidavit of the Company Secretary of JPI has been filed as paper No. A-15 testifying compliance of the court s order dated 9-4-2003 by service of this petition upon the Official Liquidator and the Central Government, i.e., the Regional Director, Northern Region, Department of Company Affairs, and advertisement in the newspapers Pioneer (English) and Dainik Jagran (Hindi) both published from Lucknow; and Economic Times and Hindustan Times both published in English from Delhi. The procedural requirements have been completed and there is no objection. 4. However, because the occasion to consider the prayer in Company Petition No. 25 of 2003 can arise only afte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held on 29-3-2003. Sri S.K. Mehrotra has raised the objection that a special appeal filed by the applicant is still pending. This fact has been taken into consideration in the 2nd paragraph of the order, dated 18-2-2003. The purpose of holding these meetings is to ascertain the views of the shareholders and creditors in respect of the proposed scheme of arrangement. There is no other purpose of these meetings. If the scheme is not approved, the applicant, i.e., H.B. Stockholding Ltd. would have no grievance left. If, however, the scheme is approved by both the shareholders and creditors, the question would arise whether the court should accord the sanction to the scheme in the confirmation petition. At that stage, the objections of H.B. Stockholdings Limited can also be examined along with any other objection received against the proposed scheme. Therefore, I see no urgency in taking up this application. It may be listed with the record." 10. The meetings were held, as scheduled on 29-3-2003, at Hotel Taj Residency, Lucknow. The creditors of both the companies present and voting, presenting more than 68% of the creditor value, have unanimously supported the scheme, and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bjectors namely, Bhavan Jain and Devendra Kumar Bansal, who claim to be shareholders of JPI, represented in these proceedings by Sri Pankaj Bhatia, Advocate, had also filed written objections on 17-5-2003 and 19-5-2003 without including therein any objections as to territorial jurisdiction. They also raised this objection for the first time in writing on 16-9-2003. 16. The objection in a nutshell was that because both the JPC and JPI have their registered office, at Lucknow, therefore, in view of section 10 of the Companies Act, 1956, the Lucknow Bench of this Court alone would have territorial jurisdiction in the matter. After hearing the parties at great length on this preliminary objection about the jurisdiction, and considering the fact that no prejudice could be shown to result to any of the objectors if the matter was heard at Allahabad, a detailed order was passed saying that in view of the facts mentioned in the said detailed order and summarised above, the Hon ble Chief Justice may be pleased to consider whether a formal order under the second proviso to clause 14 of the United Provinces High Court s Amalgamation Order, 1948, should be passed directing that this case s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er further. This was very unusual. But what was more unusual was that in reply to the court s query as to whether the HBSL was withdrawing its objections, Sri Sinha said that the objections were not being withdrawn, but he had been instructed not to argue further. He also stated that this instruction was given to him by HBSL at 10 a.m. on that very day, after he had wasted the whole weakend in preparing the case. 20. Sri Sanjay Goswami, Advocate, representing the SEBI, did not appear at all on that date for his rejoinder arguments. 21. Sri Pankaj Bhatia, Advocate, representing two alleged shareholders, namely, Bhavan Jain and Devendra Kumar Bansal, who had raised a preliminary objection only, also said that he had nothing to add by way of rejoinder. 22. Sri M.C. Tiwari, Advocate, who had filed several photo identical objections on behalf of some petty shareholders, but had not raised any argument initially, also did not advance any arguments. 23. In these unusual circumstances, judgment was reserved on 16-2-2004. The objections of SEBI 24. To revert back in time, at the hearing date on 7-11-2003, Sri Sanjay Goswami, Advocate, had appeared and submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1997, by the main promoter, Sri Jaiprakash Gaur and 3 other persons acting in concert with him, namely, Shivajay Enterprises Ltd. [formerly, known as Kamran Consultants (P.) Ltd.], Jaypee Ventures Ltd. (formerly, known as International Design Engineers Associates Ltd.) and Jaypee Hotels Ltd., is pending. It was mentioned by SEBI in the application that the intervention application had been moved for a very limited purpose to protect the interest of small investors of JPI, and it was prayed that either the sanction to the amalgamation should be deferred till the conclusion of the enquiry by the SEBI or in the alternative, the two companies be directed to inform their shareholders about the said enquiry and the possible outcome of that enquiry so that the shareholders of both the companies may take a well-informed decision on the proposed scheme of amalgam- ation. However, later, again in an unusual turn of events, SEBI changed its stand vide paragraph No. 5 of its rejoinder affidavit filed as Paper No. A 64, and stated that it had no objection to sanction of the scheme, subject to a rider being placed or undertaking being obtained that the ultimate order of SEBI should be compl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 29. During the hearing, Sri Sanjay Goswami was required by the Court to obtain instructions from the SEBI whether it was prepared to supply to the acquirers copies of the documents including the enquiry report and the investigation report so that the amalgamation proceedings could be postponed for a short period, enabling the acquirers to submit their replies and to enable the SEBI to conclude the proceedings. The enquiry report and the investigation report had been produced and shown to the Court by Sri Goswami and nothing contained therein was found to be of a nature so as to make it difficult or undesirable for SEBI to disclose the same to the acquirers. 30. On the next date, Sri Goswami stated on instructions that the SEBI was not prepared to supply the copies inasmuch as under its regulations (No. 42) - the SEBI was obliged only to communicate the findings of the enquiry/investigation and not the entire report. 31. Considering this rigid stand taken by SEBI, I have given careful thought to the various aspects of the matter. I find that if the original prayer of SEBI for postponement of these amalgamation proceedings is accepted, it may be an unduly long or even in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tting one share of JPC and it may remain possible to lift the corporate veil. The action permissible under clause ( b ), namely, restraining, disposal of the disputed shares appears to be only an interim measure as a step in aid to the action under clause ( c ), inasmuch as, perpetual restraint on disposal of certain shares without anything further would lead to obvious major complications. Again, it is not mandatory for SEBI to take all the permissible actions under regulation 44. 35. More importantly, the SEBI has totally failed in its various pleadings, including the enquiry and investigation reports, to show what possible motive the acquirers could have had, at that stage, for acquiring those shares. The promoter group, admittedly, validly held a large majority of shares of about 45% (including the shares acquired within the permissible limit of 5%), and with those additional 2.36% shares ( i.e., those in excess of the 5% prescribed limit) the holding increases to a little above 47%. The only basis for the proceedings of the SEBI appears to be the guarantee given by one of the JP Group of companies for the loan taken by Shivajay (formerly, Kamran) out of which the disputed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vention is necessary for the professed limited purpose of protecting the small investors . It has not been established that such postponement would be in the interest of the shareholders, big or small, of JPI or the creditors of the two companies, or that it would serve any public interest. It has thus not made out any ground for intervention in this matter or for postponement of the amalgamation proceedings. 38. The Official Liquidator in his report No. 156 of 2003 (Paper No. A-9) has raised no objection to the scheme. Against this report the HBSL has filed frivolous objections vide Paper No. A-33. The Central Government represented by the Regional Director, Northern Region, Department of Company Affairs, Kanpur, has vide Paper No. A-10 raised basically two objections. Even to these objections of the Regional Director, the HBSL has filed objections, vide Paper No. A-34. 39. The first objection of the Regional Director is that the procedure has not been followed for the change of name of the amalgamated company from Jaypee Cement to Jaiprakash Associates Ltd., which name has been undisputedly made available by a letter, dated 5-2-2003, of the Registrar of Companies o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re capital of JPC. According to the Regional Director, this amounts to increase of the authorised capital of JPC, which cannot be done without paying the requisite fee/stamp duty to the Government. In reply to this objection, it was submitted on behalf of JPC that the fee/stamp duty is nominal and has a maximum limit which the JPC is prepared to pay. But, it was submitted that the requisite fee has already been paid on the authorised capital of JPI and merely because of its merger with JPC, there is no reason why the same fee should be paid again by JPC on the same authorised capital. 41. The submission has force and no good reason has been shown why the two merged companies should be required to pay duty again on the same authorised capital on which duty has already been paid by the JPI. 42. Regarding the increase of authorised share capital by merger of the authorised capitals of the two companies, an order can be passed under section 391 of the Companies Act itself. This has been laid down by the Bombay High Court in the case of Vasant Investment Corpn. Ltd. v. Official Liquidator, Colaba Land Mill Co. Ltd. [1981] 51 Comp. Cas. 20 (at page 35). The relevant part of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... two companies which were available was of the period ending 31 March, 2002, and not beyond that, because it requires time to get prepared the audit report, and for the year ending 31-3-2003, the audit can begin only after 31-3-2003. Therefore, it cannot be said that either in the company application or in the meetings or in the company petition, the latest financial position of the two companies had not been disclosed. In any case, it was submitted that there was no averment from the side of the objections that there had been any drastic deterioration in the financial position of any of the two companies, i.e., JPI or JPC since 31 March, 2002. 47. Reliance was placed on behalf of JPI and JPC on the decision of the Gujarat High Court in the case of Navjivan Mills Ltd., In re [1972] 42 Comp. Cas. 265, wherein the Gujarat High Court held as follows : ". . . The word latest is always a relative term and it has to be understood in relation to the date on which the petition is filed. . . ." (p. 318) 48. Reliance has also been placed on the decision of the Bombay High Court in the case of Blue Star Ltd., In re [2001] 104 Comp. Cas. 371 (384), in which the judgment or th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Court. But, if the same has not been produced by the company, the Court should call for it, and give an opportunity to the company to produce the relevant record and examine the same instead of dismissing the petition on this technical ground. It also appears that this requirement of furnishing the latest financial position is to be examined in the light of objections about any such drastic change in the financial position as would make the sanction to the scheme undesirable. 52. However, an affidavit of Harish K. Vaid, the President (Corporate) and Company Secretary of JPI has been filed in these proceedings, annexing thereto a copy of the balance sheets of JPI has been filed in these proceedings, annexing thereto a copy of the balance sheets of JPI as on 31 March, 2003. It has been stated that these are the latest audited balance sheets of the two companies. The affidavit has not been disputed, although the parties were given liberty by the Court for filing rebuttal up to the stage of delivery of judgment. Therefore, objection regarding non-disclosure of the latest financial position loses relevance. 53. Having examined the said records regarding the latest financial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... knowledge that the scheme is beneficial to the shareholders, and is raising the objections for ulterior motives. In this very context, a scrutiny of certain suits instituted by HBSL would be relevant and has been dealt later in this order. 56. On merits, Sri Navin Sinha, Senior Advocate representing HBSL, which according to him holds about 5% of the total paid up share capital of JPI had raised objections of which the major ones can be broadly classified under two heads, namely, ( a ) oppression and mismanagement, which are covered by sections 397 and 398 of the Companies Act, 1956; and ( b ) the non-disclosure by the company JPI of certain legal proceed- ings, namely, an enquiry by SEBI into the alleged acquisition of shares above the prescribed 5% limit, another alleged inquiry into a case of preferential allotment of shares by JPI, and the pendency of suits Nos. 1722 of 2001 and 1531 of 2002 before the Delhi High Court and Suit No. 129 of 2003 which is said to be pending before the Civil Judge, Lucknow. All the three suits have been instituted by HBSL and are dealt with later in this order. 57. So far as the enquiry of SEBI into acquisition of shares above the 5% limit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... balance-sheet and profit and loss account, and seeking appointment of a Chartered Accountant by the court in the civil suit to conduct a fresh audit. The timing of the suit needs to be noticed. 62. Suit No. 1531 of 2002 also by HBSL was instituted before the Delhi High Court on 23-9-2002 against JPI, seeking a declaration that the balance sheet of JPI as on 31-3-2002 is null and void, and all injunction restraining the JPI from considering and adopting the balance sheet (in its AGM proposed to be held just four days later on 27-9-2002) and for appointment of an Auditor by the court to carry out a special audit. Again, the timing of the suit deserves thought. 63. Suit No. 129 of 2002 was instituted before Civil Judge, Lucknow, in March, 2002, against JPI by one Lalit Bhasin through his attorney, Dr. Sanjeev Kumar, who is the Company Secretary of HBSL, again, shortly before the general meeting of JPI scheduled for 21-3-2002 seeking to restrain the holding of the general meeting. Once again, the timing of the suit should provoke thought and inquiry into the question as to whether this repeated last minute institution of suits is for good and genuine reasons or is just a device ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly, in cases of oppression of minority membership, it can be done only by a policy of the company which is not likely to affect individual members in isolation. Any such policy of oppression is bound to affect a particular class or section of members, which normally would necessarily exceed the 10% of the members either by numbers or by voting rights. Similarly, any genuine case of mismanagement is unlikely to fail to invite protest by less than such number (10%) of members. Therefore, taking the view that if the oppression or mismanagement is affecting 10% or more members by numbers or shares they will approach the Company Law Board under section 397/398 read with section 399 of the Companies Act, and if it is affecting less than that number, they can institute suits, would be contrary to public policy and would also be contrary to the legislative intent considering the spirit and purpose of such restriction imposed by the statute, i.e., section 399 of the Companies Act. Besides, acceptance to the contention of law espoused by HBSL would also mean that even where an alleged case of oppression or mismanagement is affecting more than 10% of the membership, the members are free no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd by the Madras High Court in relation to pendency of penal proceedings in the case of Cetex Petrochemicals Ltd., In re [1992] 73 Comp. Cas. 298. 71. In the present case, the only interim orders are dated 29-8-2001 and 20-9-2001 in suit No. 1722 of 2001 (at Annexures 6 and 7 of Paper No. A-7 of Company Application No. 9 of 2003). There is no other interim order in that suit, and there are apparently no interim orders in any of the other two suits. I have examined these interim orders carefully. None of the two interim orders referred to above can have any restraint upon the proposed amalgamation. 72. Thus the pendency of these suits is not a material fact as none of these suits is likely to have any bearing on the question of amalgamation. The alleged non-disclosure of the same is, therefore, not relevant. 73. The contention of HBSL that the disputed share capital should not have been allowed to participate in the shareholders meeting is also not sustainable for the following reasons. Firstly , the disputed shares which are the subject matter of the suit, i.e., ( a ) those 2.6% which are in excess of the 5% limit; or ( b ) those involved in preferential allotm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the shareholders of JPI. 75. In reply to these submissions, Sri R.P. Agarwal pointed out that depreciation is not necessarily required to be shown in the balance sheet except for the limited purpose of sections 205 and 349(4)( k ) of the Companies Act. The object of section 205 is that dividend should be paid out of profits and not out of capital. Similarly, the object of section 349 is to ensure that the profits and assets of the company are reflected, after adjusting depreciation, while considering the fixation of remuneration of its managers. It has also been pointed out from the side of JPC that under Schedule VI (Part II) of the Companies Act, the requirement as to profit and loss account have been mentioned, and at item No. 3( iv ) it is not necessary to show the depreciation. The said provision is quoted below : "( iv ) The amount provided for depreciation, renewals or diminution in value of fixed assets. If such provision is not made by means of a depreciation charge, the method adopted for making such provision. If no provision is made for depreciation, the fact that no provision has been made shall be stated and the quantum of arrears of depreciation compute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e amalgamation, including the informed prospective investors are fully aware of these consequences, because of which immediately after the approval of the scheme of amalgamation at the meetings, the share prices of JPI have registered sharp rise. In this context, Sri Agarwal relied upon a decision of the Bombay High Court in the case of Alstom Power Boilers Ltd. ( supra ) which on page 476 of the law reports indicates that such amalgamations are based on commercial wisdom. He also relied upon the decision of the Gujarat High Court in the case of Navjivan Mills Co. Ltd. ( supra ), particularly, the passages at pages 273 and 274 of the law reports. 77. Sri Agarwal submitted that assuming without conceding the contention of HBSL to be correct, it cannot be lost sight of that the assets of JPC belong to JPI, and if that company (JPC) becomes sick and is wound up on account of erosion of net worth, the JPI and consequently its shareholders would suffer inasmuch as the net worth of JPC even after accounting for the erosion is still not zero or in the negative. The argument has force; and there is no plausible reply. Therefore, even if it is a case of bail out of JPC, the decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter group. Further, it is not disputed that the meeting was widely advertised in three leading newspapers namely, The Pioneer (English) Lucknow Edition, Dainik Jagran (Hindi), Lucknow Edition and The Economic Times (English), Delhi Edition. It is also not seriously disputed during arguments that notices of the meeting were sent individually to all members under the supervision of the Chairman of the meeting, although there is such objection by some petty shareholders. But I find it difficult to accept the objection because all the written objections of these petty shareholders are virtually carbon copies of each other and there is no explanation why all these petty shareholders, having no connection with each other and belonging to different places, should converge upon the same Advocate, namely, Sri M.C. Tiwari, for filing of the objections. Thus, these petty objectors appear to have merely lent their names by way of proxy for the sake of opposition. Indeed, Sri M.C. Tiwari, Advocate, who has filed these identical objections did not even argue the matter to press the objections although he remained present. Thus, it has not been proved that individual notices were not sent o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ake. Apart from what has already been mentioned above, about the reasons for amalgamation, the creditors of these two big companies, being big financial institutions dealing with functioning of several big companies, are expected to have much more awareness than small investors. In view of the fact that the creditors of both the companies, who have much higher stakes than the dissenting shareholders, have unanimously approved the scheme of amalgamation, it appears to be safe for the court to assume, unless something striking is shown to the contrary, that the scheme is commercially sound and beneficial to both the companies. The contention of HBSL that the proposed amalgamation is not a decision which a prudent businessman would take in the circumstances is not capable of being sustained. 85. It has also been argued from the side of HBSL that earlier, the cement unit of JPI was hived off to JPC under an earlier scheme sanctioned by the Court on 27-2-2001 against which the special appeal is pending. According to HBSL, the object of the earlier scheme for the said hive off was to bring the cement business under one roof and the present scheme for amalgamation is diametrically opp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tting or pedantic fault finding. 88. In the case of Reliance Petroleum Ltd. ( supra ), the Gujarat High Court has held as follows : "The decision in law is well settled that while exercising the jurisdiction and power to sanction a scheme, the court is required to ensure that statutory provisions have been complied with, that the class of persons who attended (the) meeting was fairly represented and that the statutory majority was acting bona fide and, lastly, that the arrangement, i.e., scheme was such which an intelligent and honest man acting in respect of his interest, might reasonably approve. The Court at the same time is not required to defer from the decision of the majority arrived at the meeting, unless any of the factors is found to be wanting. A share exchange valuation will have to be approved, unless it shocks the conscience of the Court. In the same judgment, it was held that it is commercial wisdom of the parties to the scheme who have taken an individual position about the usefulness and propriety of the scheme by supporting it by the requisite majority vote that has to be kept in view by the Court. The Court has neither the expertise nor the jurisdic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it of HBSL itself (Paper No. A-32) that out of the total presence of 739 members, 714 valid votes (by number) were polled at the meeting. The scheme was approved by an overwhelming 698 members although the promoters own persons/entities were only 156 by number. 93. In the case of Miheer H. Mafatlal ( supra ), the Supreme Court held as follows (para 39 at page 614 of SCC) : "...On the express language of section 391(1), it becomes clear that where a compromise or arrangement is proposed between a company and its members or any class of them, a meeting of such members or class of them, has to be convened. This clearly presupposes that if the scheme of arrangement or compromise is offered to the members as a class, and no separate scheme is offered to any sub-class of members which has a separate interest and a separate scheme to consider, no question of holding a separate meeting of such a sub-class would at all survive...." 94. The Delhi High Court in the case of Modiluft Ltd. ( supra ) has defined as to what constitute a class? In a nutshell, the law appears to be that where some shareholders are to be treated differently from others pursuant to the proposed scheme, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m fixed by the Court 50 40% 5 40% 5 40% Total votes cast 718 90102918 143 14069066977.94 59 2112456153.95 Invalid votes 4 681 0 Votes cast in favour 698 86353547 143 14069066977.94 59 2112456153.95 % of total valid votes 96% 100% 100% Votes cast against 16 3748690 0 0 0 0 % of total valid votes cast 4% 0 0 0 0 Not voted 21 4756 0 0 0 0 96.1 Analysis of the said voting, which would indicate the fact that the members who disapproved the scheme and their percentage and the persons who despite such disagreement at the meeting, did not approach the Court to file objections, is shown by the following chart: VOTING PATTERN AT THE MEETING OF SHAREHOLDERS OF JAIPRAKASH INDUSTRIES LTD. TRANSFEROR COMPANY Nos. Shares held % Total votes polled (valid) 714 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -)2,16,62,365 6,84,40,553 681 6,84,39,872 E. Adjusted votes cast in favour No. of shares Votes cast in favour, as per Chairman s Report Less: Disputed votes as at A-3 Adjusted votes cast in favour Percentage of adjusted votes cast in favour to djusted valid votes 8,63,53,547 (-)2,16,62,365 6,46,91,182 94.52% F. Votes cast against Votes cast against, as per Chairman s Report Percentage of votes cast against to adjusted valid votes 37,48,690 5.48% 97. It is rare to find unanimity in respect of decisions. People deffer [deffer?] in their knowledge, views, approach and consequently, in their decisions. The scheme of the Companies Act suggests that the majority decision should prevail unless that decision is oppressive to the minorities or unfair to the minority dissenters or for some reasons is not in public interest. This would imply that where there is a dissent in respect of the scheme at the meeting where the decision is taken by vote without reasons, the dissenters can approach the Court with their reasons for the dissent, and t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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