TMI Blog1961 (6) TMI 22X X X X Extracts X X X X X X X X Extracts X X X X ..... s, five of whom were Ravindra, Surendra, Bipinchandra, Hareshchandra and Krishnakumar, all sons of one Maganlal, (hereinafter referred to in this judgment as 'the five brothers'). The other three partners were Babulal Chunilal, Dineshchandra Chimanlal and Chandrakant Amrilal. The last three are the cousins of the five brotheRs.On 1st April 1959, the five brothers held 2086 ordinary shares in the Sidhpur company, which roughly is 13.57 per cent of the total share capital of the company, and the other three partners, who are opposing the present petition, held 2384 shares, which roughly is 15.75 per cent of the total share capital. On 1st April 1959, the Sidhpur company was principally manufacturing cloth and yarn of coarse and medium counts, though recently, machinery for manufacturing fine and superfine goods had come to be installed. 3. The Sidhpur company is to be amalgamated with The Raghuvanshi Mills Ltd., having its head office at Bombay, (hereinafter called 'the Bombay company'). It was incorporated in 1923. The premises of this company were destroyed in a fire in 1944. New machinery was installed thereafter. Thus, the plant and machinery of the Bombay comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of its uneconomic working; and that this would' have resulted in unemployment amongst its workers.In paragraph 15, Shri Ratilal further deposes that, in the light of the aforesaid circumstances, he and his co-director Trikamlal Girdharilal made, sometime prior to the month of May 1959, a suggestion for amalgamating the Sidhpur company with the Bombay company. He states that, at the relevant time, the Bombay company was in a more prosperous condition than the Sidhpur company. The Bombay company was engaged in the production of superfine cotton yarn and art silk fabrics which goods were either being sold locally or exported under the Export Promotion Scheme. Shri Ratilal further deposes that he and his co-director felt that, if a scheme was formulated for amalgamating the two companies, it would add to their prosperity and would result in mutual advantages to them. He deposes that, therefore, negotiations were started between the two companies, as a result of which a scheme was formulated by mutual consent. He states that that scheme was formulated after considerable discussion and deliberation and was, ultimately, placed before the Boards of Directors of both the companies and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the amalgamation of the two companies, they will have a reasonable prospect of getting dividends almost immediately, although the company had not Been able to pay any dividend for a number of years in the past. 7. Both the Sidhpur and the Bombay companies made petitions under Section 391 of the Companies Act, 1956, to the High Court of Bombay for calling meetings of their respective shareholders for consideration of the aforesaid scheme. The High Court ordered the meetings to be called on 19-2-1960. The petitioner issued a notice to its shareholders calling a meeting on 19-2-1960 for consideration of the scheme. A statement was annexed to the notice as required by Section 393, Clause (a) setting forth the terms of the scheme and certain other matters, to be presently mentioned. The Sidhpur company also summoned another meeting of its shareholders for the purpose of considering certain resolutions which it thought were required to be passed to carry out the scheme. On 19th February 1960, therefore, two meetings of the shareholders of the Sidhpur company were held. One was the official meeting at which a resolution was moved for approval of -the scheme. The second was an extra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter the reorganization, both the aforesaid petitions continued to be pending in the High Court of Maharashtra. However, later on, the opposing shareholders raised a contention before that Court that, after the reorganization, the 'High Court of Maharashtra had no jurisdiction to (SIC) with the petition of the Sidhpur company and that the only Court which had jurisdiction to do so was the High Court of Gujarat. On this contention being raised, the learned Chief Justice of the High Court of Maharashtra, in exercise of the powers conferred upon him by the States Reorganization Act, transferred the present petition to this Court and that is how this petition comes up for hearing in this Court. 11. The petition is opposed by Babulal Chunilal, Chandrakant Amritlal, Dineshchandra Chimanlal and some others.Babulal Chunilal is the director of the Sidhpur company. He, Chandrakant Amratlal and Dineshchandra Chimanlal are partners In the firm of the managing agents of the Sidhpur company. These persons are supported by same shareholders of the company. The total share-holding of these persons is about 899 share. Some of these shareholders were present at the official meeting of the comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opposing partners to state that their total holding in the Bombay company amounted to 33304 shares and that, as a result of the amalgamation, the new shares which would come to be allotted to them would be 58,282 shares, which, together with the existing shareholding of the five brothers and the other opposing partners and the directors in the Sidhpur company would make 62,752 shares in a total share capital of 85096 shares, which roughly would constitute about 74 per cent of the total number of shares of the amalgamated company, thus giving them almost 3/4th majority vote at any meeting of the company. The second contention is that the ratio of shares which was given to the Bombay company for transferring its assets and liabilities to the Sidhpur company was unfair and unreasonable and that the directors had not taken into consideration all the relevant circumstances bearing upon that ratio, and that, if all the material facts had bean properly considered and assessed, the ratio would not have been that which was actually agreed to he allotted to the shareholders of the Bombay company. It is, therefore, contended on these and certain other subsidiary points, which will be presentl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Justice Lindley, which immediately follow those which I have read, shew that that is not what Lord Justice Lindley meant. He proceeds as follows: And then see whether the scheme is a reasonable one or whether there is any reasonable objection to it, or such an objection to it as that any reasonable man might say that he could not approve of it . Then Lord justice Lindley, when he proceeds ft deal with Mr. Rigby's argument in details, plainly declines to treat the matter as resting upon the mere basis that the resolution of the creditors, not having been shewn to be malatide, leaves him no discretion. He goes on to deal with the question of whether the scheme is a reasonable scheme or not, and says (2) Therefore, if you hah at it from a commercial point of view, and not from a lawyer's point of view, you are in a decidedly better position by this scheme than you would be if things were felt alone. That is the view of the majority. Now can anybody say that this is not a reasonable view for the majority to take? Whether they have other interests or not, I think we ought to see whether anything can be said against the reasonableness of the view taken by the majority of the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dgments delivered by those two Justices. The only passage which he could point out in support of this contention was the following passsage is the judgment of Bowen, L.J. at p. 244: The true conclusion is that the mass of first-class debenture-holders take the view that this commercial scheme will work, and that it is the best thing that can be done In the interest of themselves as holders, of first class debentures . I do not agree that the aforesaid passage bears out the contention of the learned Solicitor General. I have no doubt whatsoever that, in that passage, Bowen, L J. was not at all discussing the question of burden of proof. Some of the passages in the judgment of Lindley, L.J. are capable of being read as if the learned Judge inteaded to threw the burden upon the opposing creditors or members.For example, in the following passage, where the learned fudge has put a number of questions which require to be answered in a petition of the present kind, language is used in such a way that it is open to anyone to contend that the learned Judge intended to them the burden upon the opposing creditors or members. Therefore, if you look at It from a commerce) point of vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the learned Judge of the Calcutta High Court. I am unable to discover anything therein which would even remotely show that Lord Bowen laid down or intended to lay down that the burden of proof was on the opponents. In the above passage, the learned Judge of the Calcutta High Court has observed that it has been repeatedly held that the onus of proving unreasonableness or unfairness is on those who object in the sanction of the scheme. The learned Judge has, however, not quoted any authority for this particular proposition. The learned Solicitor General was unable to point, out to me even a single authority other than AIR 1959 Cat 679, in which such a proposition was laid down. In fact, he stated that that was the solitary case reported In India under Section 391 of The Indian companies Act which he had been able to discover. In my judgment, Mr. Amin is right that, in Re Alabama's case, (1891) 1 Ch 213, it has not been decided that the burden of proof is on the opposing creditors or members.Having regard to the above considerations, in my judgment, it is not possible to say that there is authority for the proposition that the burden is on the opponents to show that the scheme is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 considers to be reasonable and in the interest of the company and the class of persons whom it represents. In that case, the majority will suffer on account of the intransigence of the minority. On the other hand, if the majority has interests adverse to the minority or where a majority has been rigged up, the minority is bound to suffer or to be tyrannised by sheer strength of numbers.Therefore, the legislature has provided that if a meeting has taken a certain decision, then, 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 to a case of the present kind is to bear in mind that the Court is neither called upon merely to register a decision of the majority, nor is it called upon to act in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve on those other interests. The decision of the majority can be respected only in so far as the Court is satisfied that the majority is acting honestly for and on behalf of the interests which it seeks to represent and, if, in any case, the Court finds that the majority is acting dehors the interests of the class whom it seeks to represent, then, the decision will not have that sanctity which it otherwise will possess. In considering this question, the Court must also bear this point in mind that, after all, it is dealing with a compromise, and that, on the same subject, honest people are likely to entertain different opinions. The Court will not view the Scheme with a view to find out whether it is an ideal scheme. The Court will consider it bearing in mind the fact that commercial people, when they have got to deal with a number of points, some of them difficult to decide, are likely to emphasize some points on some occasions or in some' situations and to minimize or ignore them on some pother occasions or situations. Therefore, the scheme has not got to be scrutinized by the Court with that much care with which an expert will scrutinize it; nor will it approach it in a carp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interests of that class at stake. 15. Therefore, in my judgment, the correct approach to the present case is (i) to ascertain whether the statutory requirements have been complied with, and (ii) to determine whether the scheme as a whole has been arrived at by the majority bonafide and in the interests of the whole body of shareholders in whose interests the majority purported to act, and (iii) to see whether the scheme is such that a fair and reasonable shareholder will consider it to be for the benefit of the Company and for himself. The scheme should not be scrutinized in the way a carping critic, a hair-splitting expert, a meticulous accountant or a 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 the other sides have or have not been protected. It must be tested from the point of view of an ordinary reasonable shareholder, acting in a businesslike manner, taking within his comprehension and bearing in mind all the circumstances prevailing at the time when the meeting was called ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as such or as members or creditors of the company or otherwise, and the effect on those interests, of the compromise or arrangement, if, and in so far as, it is different from the effect on the like interests of other persons; and (b) id every notice calling the meeting which is given by advertisement, there shall be included either such a Statement as aforesaid or a notification of the place at which and the manner in which creditors or members entitled to attend the meeting may obtain copies of such a statement as aforesaid. (2) Where the compromise or arrangement affects the rights of debenture holders of the company, the said statement shall give the like information and explanation as respects the trustees of any deed for securing the issue of the debentures as it is required to give as respects the company's directors. (3) Where a notice given by advertisement includes a notification that copies of a statement setting forth the terms of the compromise or arrangement proposed and explaining its effect can be obtained by creditors or members entitled to attend the meeting, every creditor or member so entitled shall, on making an application in the manner indicated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 's contention is that two things should have been mentioned in the statement and that, as this. is not done, the effect of the scheme has not come to be explained to the shareholdeRs.Mr. Amin contends that the details of the processes by which the ratio of 1 3/4th shares had been arrived at should have been mentioned, in the statement accompanying the notice and, secondly, that the statement should have mentioned to the shareholders that the benefit which was to accrue to the amalgamated company on account of the carry forward losses representing the unabsorbed depreciation was subject to the sanction which was to be accorded by the Controller of Capital Issues. As regards the second limb of Clause (a), the contention of Mr. Amin is that it was necessary that the shareholding of the five brothers In the Bombay company should have been mentioned in the statement. The: contention is that the statement should have mentioned that the five brothers held between them 27057 shares in the Bombay company, and that, as a result of the amalgamation, they would get 13/4 shares in the Sidhpur company for each of those shares. He also contends that the shareholding of the relatives and the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tives or the friends or the supporters of the directors and the managing agents. 19. I may also dispose of another contention of Mr. Amin viz. that the details as to how the ratio Had been arrived at and the fact that the benefit which was likely to accrue to the amalgamated company on account of the unabsorbed depreciation was subject to the sanction of the Controller of Capital issues, should have been mentioned in the statement. Mr. Amin contends that these two things Were necessary to be mentioned for the purpose of explaining the effect of the scheme, I cannot agree with this contention. It is true that the first part of Clause (a) requires not only that the terms of the scheme must be stated, but, it further requires that the effect of the scheme must be explained. Therefore, the statement must contain not only the terms of the scheme, but must also further explain as to what its effect would be. The clause does not state in terms as to the effect on what has got to be mentioned in the statement Broadly speaking, however, it is quite clear that what has got to be explained are not the details of the scheme, but, the effect which the scheme will have obviously on such matte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on those interests, if, and in so far as, it is different from the effect on the like interests of other persons. There is no dispute that every kind of interest is not to be mentioned. Only material: interests are to be so done. The question as to what is material interest or not, may not be considered at this. stage. But, the poser which the learned Solicitor General raises regarding this part of the clause is as to what interests are covered by this part of the clause. He contends that interests of the concerned persons in the company atone are to be mentioned and not interests in anything' dehors the company. The effect of the construction which the learned Solicitor General seeks to place upon this part, of the clause will be that only Interests in the Sidhpur company should have been mentioned and not those in the Bombay company. Thus, the contention of the learned Solicitor General is that interests which are to be mentioned are those which directors, managing director, managing agent, secretaries and treasurers or manager of the company (hereafter called the persons concerned) hold in a company in relation to which they hold such positions and not in relation to some ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rms of the scheme. If the Legislature, after-having spoken in the first limb about the terms of the scheme, intended suddenly to switch off to some other topic, then, probably, the Legislature would have used appropriate language to convey the idea that the interests which it had in mind were interests which related to something else. Secondly, the provisions of Clause (b) and sub-section (3) show that the two limbs of Clause (a) deal with one and the same topic, viz. the compromise, arrangement or scheme. In Clause (b) of Sub-section (1), it is laid down that If the notice calling the meeting does not include 'the statement' in Clause (a) a notification of the place at which and the manner in which the shareholders may obtain 'the copies of such statement' should be published. Sub-section (3) easts a duty upon the company to furnish free of charge to the shareholder a copy of 'the statement' if an application happens to be made for the purpose by the shareholder. There cannot be any doubt that the term 'statement' used in both Clause (b) and Sub-section (3) refer to a statement setting forth the terms of the compromise or arrangement proposed and e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntioned in the statement if and In so far as that effect is different from the material interests which any other person interested In the scheme may have. The learned Solicitor General contends that the last part of the second limb which requires the effect of material interests to be stated supports his submission. His contention is that the expression like Interests of other persons refers to the interests of those persons in the company itself and has no relation to the scheme referred to in Clause (a). This argument is untenable. The latter part of the clause says that what is to be mentioned is the effect of the scheme. In other words, the effect which has got to be explained is the effect on those interests, meaning the interests of the director, etc., whether in the company or dehors the company. The effect which is to be explained is the effect of compromise or arrangement . Such an explanation is to be given only if and in so far as the effect on those interests is different from the effect on the like interests of other persons . The expression the like interests of other persons obviously has reference to material interests of persons other than those mentioned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quired to mention the interests of the other concerned persons. He contends that this construction follows from Subsection (4) of Section 393. He argues that if She law were that every concerned person is required to mention not only his own material Interests, but also those of every other person concerned, then, it will lead to a situation where a person will come to be punished for a fault committed by someone else. He argues that one concerned person may not be in possession of all the facts relating to the material interests of the other concerned persons and it is highly Improbable that the Legislature can have intended to punish a person for a default committed by another person. He argues that, therefore, Sub-section (4) must be so construed that it will punish only those who actually fail to communicate their own interests and of none else. Thus, the learned Solicitor General contends that the interests which each of the five brothers possesses cannot be said to be a material interest. He contends that this will be so only if the interests of all the five brothers are combined together. Therefore, his contention is that, as there is no obligation on the five brothers to me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rms that a person shall not be punishable under Sub-section (4) if he shows that default was due to the refusal of any other person being a director, managing director, managing agent, secretaries and treasurers, manager or trustee for debenture holders, to supply the necessary particulars as to his material interests. In other words, if Sub-section (4) is read together with the proviso, the effect is that every concerned person who makes an honest attempt to acquaint himself with the material interests of all the concerned persons, but, is unable to furnish information on account of the refusal of those other concerned persons, then, he will not be criminally responsible. That the aforesaid construction is the correct construction also follows from the provisions contained in Sub-section (5). If any concerned person has interest in the company or the scheme which is material within the meaning of Clause (a), it is necessary that ha should furnish that information to the company and the other concerned persons and if he fails to do so, then, he renders himself liable to be punished under Sub-section (5). This is an additional criminal liability of a Kind other than the one imposed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quite obvious that the effect on the shareholders of the Bombay company of this interest in the scheme is different from the like interest of the shareholders of the Sidhpur company in the same scheme. The effect of the allotment of shares to the shareholders of the Bombay company, to the directors and the managing partners will be that they will have a majority of 57% and thus they will have a dominant voice in the management of the company. From the point of view of the opposing shareholders, who do not happen to be directors or partners in the managing agency, it is quite obvious that the effect of the allotment of the shares to the directors and the partners -- in the managing agency will be to give the latter such a dominant voice that, if they happen to act together, they will be in a position to get even a special resolution passed by securing only 1% vote from the balance of shareholders.Therefore, it is quite clear that the interests, which the directors and partners in the managing agency will be acquiring under the scheme, will be material interests and the effect which the scheme will have on the interests of the directors and the partners in the managing agency will b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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