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TMI Blog2009 (3) TMI 564X X X X Extracts X X X X X X X X Extracts X X X X ..... aid 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 convening and holding of the meeting of the only secured creditor of the transferor-company was also dispensed with in view of the averment in paragraph 15 of the Company Application, that there was only one secured creditor viz. Punjab National Bank of the value of Rs. 4,43,92,831 who would not in any way be affected b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any. 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 affidavit read as under :- "(viii)That affidavits vide dated 16-12-2008, Mr. Ashok Kotwani, Managing Director of the Transferee-Company admitted that the company and its directors, having regard to the legal opinion and certificates of Company Secretaries, have violated provisions of section 297 of the Companies Act, 1956 during the last 3 year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 accordance with the directions or instructions of the Board, or of any director or directors, of the lending company. (2) Sub-section (1) shall not apply to- (a )any loan made, guarantee given or security provided- (i )by a private company unless it is a subsidiary of public company, or (ii )by a banking company; (b )any loan made by a holding company to its subsidiary company; (c ) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. Information as to compromises or arrangements with creditors and members.-(1) Where a meeting of creditors or any class of creditors, or of members or any class of members, is called under section 391,- (a )with every notice calling the meeting which is sent to a creditor or member, there shall be sent also a statement setting forth the terms of the compromise or arrangement and explaining its effect; and in particular, stating any mater ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Directors of both the companies would constitute material facts qua both the companies. 19.The question then is whether there was an adequate disclosure of the facts to the concerned persons. I am of the opinion that there was. 20. Firstly, I do not find the guarantee having been given by the transferee-company in respect of the facilities granted by the Punjab National Bank to the transferor-company, by itself, to warrant a refusal to the schem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, 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 creditors discloses the names of the said Ashok Kotwani and Mrs. Kanchan Kotwani as directors of the transferee-company as well as the transferor-company and also furnishes details of their shareholdings in both the companies. The said notices state that the directors of the transferee-company as well as of the transferor-company have no interest in the scheme except as shareholders in general. 23. In the circumstances, I see no reason to compel the facts regarding the violation under secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 passage, which reads thus:- "In other words, if the director possesses any interest of whatever kind in the scheme, then, that interest must be stated in the statement accompanying the scheme." [Emphasis supplied] I have already held that there is nothing to indicate that the directors possess any interest "in the scheme" except as shareholders of the Petitioners in general. 26. Mr. Joy further relied upon a judgment of a learned Single Judge of this Court in Bharat Synthetics Ltd. v. Bank of India [1995] 82 Comp. Cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 creditors of both the companies. It is not even contended before me that the scheme itself is only to benefit the concerned directors or any other particular person or persons. 31. Mr. Joy merely submits that the meetings must be convened once again, specifically stating that there is a violation under section 295. 32. I do not agree. The members and the creditors already had the relevant information including about the facts of the guarantee and the names of the directors of both the companies. 33. This brings me to Mr. Joy's submission that in view of the vio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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 guarantee for a loan from the transferee company. In other words, according to him, while section 295 renders several transactions impermissible, section 283(1)(h) renders the directors liable to vacate office only in certain cases, covered by section 295. 36. Mr. Mehta's submission is well founded. There are various transactions under section 295 which are impermissible without the previous approval of the Central Government, only some of which are specified in section 283(1)(h). Thus, under section 283(1)(h) the office of a director does not become vacant for any violation of section 295. It becomes vacant onl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 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 issued the guarantee on 5-6-2006. On this date, there were five directors on the Board of the transferee company. Two of them viz. Ashok Kotwani and Mrs. Kanchan A. Kotwani were also directors of the transferor company. Even assuming that they vacated the office of directors of the transferee company by virtue of section 283(1)(h) the transferee company had three other directors viz. Biswajit Ghosal, Krushnakant Dharia and R. Rajangam. The said R. Rajangam and Krushnakant Dharia resigned as directors with effect from 30-6-2006 and 30-6-2007 respectively. One Rajesh Nawathe and one Shashin Shah were appointed as additional directors of the transferee company on 30-6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terwards 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 283(1)(h), is that it is more than just an arguable case. 49. The term "terminated" would include a director vacating office by virtue of section 283. This is clear from the words of section 290 :- ". . .had terminated by virtue of any provision contained in this Act. . . ." In that event, what is important to note is that, it can hardly be suggested that the said two directors were cognizant or aware or of the view that their appointment had terminated. They quite obviously were oblivious of their alleged disqualification. Had they been aware of the same they would have taken steps to remedy the defect. There was no reason whatever for them to let the invalidity continue. I have no reason ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ani 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 shares and making a call for the money were passed in a meeting in which there was no quorum. The Official Liquidator relied upon Article 181 which it was held was couched in the same words as section 86 of the Indian Companies Act, 1913. It would be useful at this stage to set out Article 181 and section 86 which read as under :- "Article 181. All acts done by any committee of Directors or by any person acting as a Director shall, notwithstanding that it be afterwards discovered that there are some defects in appointments of any such directors or persons acting as aforesaid or that they or any of them are disqualified, be as valid as if every such person have been duly appointed and was qualified to be a Director." Section 86 of the 1913 Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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. There was no defect in their appointment as Directors; the only defect is that they continued to act as Directors even after their disqualification. There is no suggestion that they acted dishonestly in passing the resolutions of allotment and making the calls. It seems that they acted bona fide, oblivious of the fact of their disqualification. There is no evidence of the fact of their disqualification having ever been brought to their minds. The language of article 181 fully protects their actions. Had it been a case of only one or to Directors continuing to act as such despite the disqualification, I would have had no hesitation in forming the conclusion that I have. Here we have to deal with a large number of Directors acting as such despite the qualification. But ..... X X X X Extracts X X X X X X X X Extracts X X X X
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