TMI Blog2009 (3) TMI 564X X X X Extracts X X X X X X X X Extracts X X X X ..... tail. Suffice it to state, that under the scheme, the entire undertaking of the transferor-company is to stand transferred to and vested in the transferee-company as a going concern, subject to the same being sanctioned by this Court. Under the scheme, two equity shares of Rs. 10 each credited as fully paid up capital of the transferee-company are to be issued and allotted to all the equity shareholders of the transferor-company for every one equity share of the face value of Re. 1 each, held by them of the transferor-company. 3. The petitioners are under the same management. This was so stated in the Company Application as well as in the Company Petition. 4. Company Application No. 253 of 2008 was taken out by the transferor-company and Company Application No. 254 of 2008 was filed by the transferee-company. The Company Applications were disposed of by orders dated 22-2-2008. 5. (A) In Company Application No. 253 of 2008 the learned Judge dispensed with the convening and holding of the meeting of the equity shareholders of the transferor-company in view of the consent given by all equity shareholders agreeing to the scheme of amalgamation. By the said order, the conveni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cured creditors. (B) There is no dispute that the procedure as well as the above orders were duly complied with. The equity shareholders and the unsecured creditors approved the scheme. (C) By an order dated 25-4-2008 in the above petition, directions were passed in similar terms as those in respect of the transferor-company. This petition, therefore, comes up for final hearing. 7. The Official Liquidator has filed an affidavit in Company Petition No. 382 of 2008 stating that the affairs of the transferor-company had been conducted in a proper manner and that the transferor-company may be ordered to be dissolved by this Court. The Official Liquidator has not opposed the scheme being sanctioned. 8. As noted above, the entire procedure has been followed. Notices have been given to all the concerned parties. There has been no objection raised by any shareholder or creditor or any other person to the scheme being sanctioned. 9. The Regional Director, however, has filed a common affidavit in the above Company Petitions stating that subject to what is stated in para- graphs ( viii ) and ( ix ), the scheme appears to be in order. Paragraphs ( viii ) and ( ix ) of the aff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the transferor and the transferee-companies, the guarantee was issued contrary to and in violation of section 295. 11. Section 295 reads as under : "295. Loans to directors, etc. (1) Save as otherwise provided in sub-section (2), no company (hereinafter in this section referred to as the lending company ) without obtaining the previous approval of the Central Government in that behalf shall, directly or indirectly, make any loan to, or give any guarantee or provide any security in connection with a loan made by any other person to, or to any other person by, ( a )any director of the lending company or of a company which is its holding company or any partner or relative of any such director; ( b )any firm in which any such director or relative is a partner; ( c )any private company of which any such director is a director, or member; ( d )any body corporate at a general meeting of which not less than twenty-five per cent of the total voting power may be exercised or controlled by any such director, or by two or more such directors together; or ( e )any body Corporate, the Board of directors, managing director, or manager whereof is accustomed to act in acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng three-fourths in value of the creditors, or class of creditors, or members, or class of members, as the case may be, present and voting either in person or, where proxies are allowed under the rules made under section 643, by proxy, at the meeting, agree to any compromise or arrangement, the compromise or arrangement shall, if sanctioned by the Tribunal, be binding on all the creditors, all the creditors of the class, all the members, or all the members of the class, as the case may be, and also on the company, or, in the case of a company which is being wound up, on the liquidator and contributories of the company : Provided that no order sanctioning any compromise or arrangement shall be made by the Tribunal unless the Tribunal is satisfied that the company or any other person by whom an application has been made under sub-section (1) has disclosed to the Tribunal, by affidavit or otherwise, all material facts relating to the company, such as the latest financial position of the company, the latest auditor s report on the accounts of the company, the pendency of any investigation proceedings in relation to the company under sections 235 to 251, and the like. 393. Informat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y member or creditor of the company from proposing a scheme under sections 391 and 394. Even if, for instance, a company is adversely affected due to any acts on the part of its directors, it would not be unusual for an arrangement to be arrived at between the company and its creditors. 17. In a given case the Court may well order any additional facts not earlier noticed, to be placed before the members and/or the creditors of the company to enable them to reconsider their decision to support the scheme. This would depend upon the answer to two questions. Is the fact a material one, to wit, is it relevant or material to the scheme that is proposed. If the answer is in the affirmative, the next question is whether there was an adequate disclosure of the facts to the members, shareholders and other concerned persons. If the answer to either of the questions is in the negative there does not arise the necessity of placing the material before the concerned persons. 18. In the present case, the fact of the guarantee issued by the transferee-company to the Punjab National Bank in respect of the loans advanced by the bank to the transferor-company and the details of the Board of D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atives : Mr. Ashok K. Kotwani, Mrs. Kanchan A. Kotwani, Mr. Bhagwan K. Kotwani, Mr. Manohar K. Kotwani, Mr. Ankuish A. Kotwani, Ms. Neha A. Kotwani, M/s. Sayuj Telcom, M/s. Dolly Designs, Mrs. Kavita Godhwani." [Emphasis supplied] (C) The annexure to the Auditor s Report for the year ended 31-3-2007 discloses the opinion of the auditors that the terms and conditions on which the guarantees given by the transferee company for the loan taken by others from the bank are, prima facie , prejudicial to the company. This was a part of the 21st Annual Report for the year 2006-07 which was circulated to all the shareholders. The shareholders, therefore, had the necessary material before them regarding the guarantee. (D) The Annual Report for the financial year 2006-07 of the transferor-company in Schedule "C", which forms part of the balance-sheet with details of secured loans, refers to the guarantee furnished by the transferee-company in respect of the facilities granted by the Punjab National Bank. (E) The notice of the meeting convened by the Court by the aforesaid order dated 22-2-2008 in the petition filed by the transferee-company, to the shareholders and the unsecured c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r kind in the scheme, then that interest must be stated in the statement accompanying the scheme. In that case, it was found that the directors, in fact, possessed an interest in the scheme other than merely as shareholders of the company and that the same had not been disclosed. (B) In the present case, as mentioned earlier, there is nothing to indicate that the directors possessed any interest of any kind in the scheme other than as shareholders of the two companies. Further, the fact of the guarantees and the extent of the liabilities have been disclosed to the shareholders and the members as well as to the Official Liquidator, the Regional Director and the Court, which was not the case before the Kerala High Court. 25. Mr. Joy then relied upon the judgment of a learned Single Judge of this Court in KEC International v. Kamani Employees Union [2002] 109 Comp. Cas. 659. He relied upon page 681 of the report which, in turn cited with approval the passage from the judgment of the Gujarat High Court in Sidhpur Mills Co. Ltd. s case ( supra ), which was also referred to by the learned Judge of the Kerala High Court. It is important to note the last sentence in this pas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 29. The above judgment was affirmed by the Supreme Court in Hindustan Lever Employees Union v. Hindustan Lever Ltd. 1995 Suppl. (1) SCC 499 1 . In paragraph 58, the Supreme Court held as under : "58. In the facts of this case, considering the overwhelming manner in which the shareholders, the creditors, the debenture-holders, the financial institutions, who had 41 per cent shares in TOMCO, have supported the Scheme and have not complained about any lack of notice or lack of understanding of what the Scheme was about, we are of the view, it will not be right to hold that the explanatory statement was not proper or was lacking in material particulars." (p. 521) 30. I am satisfied that the disclosures made in the present case enabled the members and the creditors to make a informed decision which they did while supporting the scheme. There has been no opposition to the scheme being sanctioned by anyone. Indeed, even the Regional Director does not oppose the scheme as such. I do not find the violation under section 295 to have any bearing on the scheme such that I ought to overrule the decision of all those who desire it to be implemented including the members and cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Mr. Mehta submitted that the directors have not vacated office under section 283(1)( h ). He further submitted that one of the directors, Mrs. Kanchan Kotwani had in any event been reappointed as a director after she allegedly vacated office and that thereby there were at least three directors on the Board of Directors of the transferee company and at the meeting held on 20-11-2007. Lastly, he submitted that even if these two submissions are answered against him the resolution at the meeting of the Board of Directors is not void in view of section 290. 35. Mr. Mehta submitted that even assuming that there was a violation of section 295 on account of the transferee company having furnished a guarantee in favour of the Punjab National Bank in respect of the loans advanced to the transferor company, the said directors, Mr. Ashok Kotwani and Mrs. Kanchan Kotwani had not vacated their office under section 283(1)( h ). According to him, section 283(1)( h ) does not apply to such a case. He submitted that in the facts of the present case the private company viz., the transferor company of which they are directors, had not accepted a loan from the transferee company nor a guarant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any other person by any private company, of which any such director is a director or member. The expression "any such director" refers to a director of the lending company. In the present case, the said Mr. and Mrs. Kotwani were directors of both the companies. Thus, the transferee company was prohibited from giving any guarantee in connection with a loan made by any other person viz. Punjab National Bank to any private company viz. the transferor company, of which the said Mr. and Mrs. Kotwani were directors and members. However, section 283(1)( h ) does not include within its scope such a contravention of section 295. Neither the said Mr. and Mrs. Kotwani nor the transferor company accepted any guarantee for a loan from the company. 41. Thus, neither Mr. nor Mrs. Kotwani vacated office as directors of either the transferor company or the transferee company. 42. Mr. Mehta further submitted that even assuming that Mr. and Mrs. Kotwani had vacated office as directors of the transferee company, there was a validly constituted Board of Directors and that there was present the requisite quorum, at the said meeting held on 20-11-2007. 43. The transferee company had issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Board of Directors of the transferee company and at the meeting held on 20-11-2007 there was the requisite quorum as Mrs. Kanchan Kotwani had in any event been re-appointed at the AGM held on 28-9-2007. 47. It is not necessary to decide this question of law in the present case. Even assuming Mr. Joy s submissions on both the points are correct, it would make no difference to the validity of the resolution dated 20-11-2007. Mr. Mehta s reliance upon section 290 of the Companies Act in this regard is well founded. Section 290 of the Companies Act reads as under: "290. Validity of acts of directors. Acts done by a person as a director shall be valid, notwithstanding that it may afterwards be discovered that his appointment was invalid by reason of any defect or disqualification or had terminated by virtue of any provision contained in this Act or in the articles: Provided that nothing in this section shall be deemed to give validity to acts done by a Director after his appointment has been shown to the company to be invalid or to have terminated." 48. The least that must be said in favour of Mr. Mehta s submissions, specially as regards the applicability of section 28 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tue of any provision contained in this Act or in the articles." 53. Further, the scheme operates not merely qua the directors but all the members and the creditors of both the companies. 54. Section 290 would also be applicable in cases such as this where directors act despite there not being the minimum number of directors required by the Articles of Association as a consequence of one or more of the directors vacating office for any reason, such as, under section 283. There is no warrant to curtail the ambit of section 290 by excluding such cases. 55. Thus, even assuming that the required number of directors were not present at the meeting held on 20-11-2007 the same would not invalidate the resolution. 56. In Shiromani Sugar Mills Ltd. v. Debi Prasad AIR 1950 All. 508, it was contended that the directors who voted for the allotment of shares were disqualified to act as such directors and that the allotment was therefore ultra vires and of no effect. It was found that the directors not having acquired the qualification shares had indeed ceased to be directors under section 85 of the Indian Companies Act, 1913. Consequently, the resolutions allotting the sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lified subsequently on his parting with his shares. His acting as Director in spite of the disqualification was held to be exactly within the words of the article and one of those defects, irregularities or whatever else one ought to call them; which are remedied by article 114 which is in almost the same words as our article 181. An identical article again came up for discussion in British Asbestos Co. Ltd. v. Boyd (1903) 2 Ch. 439 : (73 L. J. Ch. 31). Farwell J. stated at page 444 : It is not, therefore, that the facts are not known, but that the knowledge of the defect is not present to the mind of any person to whom it is material at the time to know it. As it is put in Buckley on the Companies Acts, 8th Edn., p. 230, the object of an article like this and section 67 of the General Act, is to make the honest acts of de facto Directors as good as the honest acts of de jure Directors . In the present case, the directors certainly knew that they had not paid the allotment and call moneys, but there is nothing to indicate that the fact that they had thereby disqualified themselves was present to their minds at the time when they allotted the shares and made the calls. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... twithstanding that it be afterwards discovered that there was some defect in the appointment of any such directors or persons acting as aforesaid or that they or any of them were disqualified, be as valid as if every such person had been duly appointed and was qualified to be a director". There is no evidence that the directors were aware of the disqualification which would be incurred by entering into contracts of sale or purchase or supply of goods with the company without the express sanction of the directors. By the subsequent discovery that they had incurred disqualification, because they had entered into contracts with the company for sale or purchase or supply of goods, the resolution passed by them is not rendered invalid. It is in the view we have taken, unnecessary to decide whether section 86 of the Indian Companies Act, 1913 also grants protection to acts done by directors who are subsequently discovered to be disqualified." 59. Thus, in any view of the matter the resolution dated 20-11-2007 is saved and cannot be held to be void. 60. It is however clarified that this order sanctioning the scheme will not in any manner affect any action that may be taken by an ..... X X X X Extracts X X X X X X X X Extracts X X X X
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