REPORTABLE IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION

CIVIL  APPEAL NOS.    1430-1431      OF 2011 (Arising out of S.L.P (C) Nos. 8497-8498 of 2009)

SESA INDUSTRIES LTD. — APPELLANT

VERSUS

KRISHNA H. BAJAJ & ORS. — RESPONDENTS

J U D G M E N T

D.K. JAIN, J.:

Leave granted.

2. These appeals, by special leave, are directed against the judgment dated  

21st February, 2009 delivered by a Division Bench of the High Court of  

Bombay at Goa whereby the Division Bench has set aside the judgment  

of  the learned Single Judge dated 18th December,  2008,  sanctioning a  

scheme of amalgamation between the appellant company and Sesa Goa  

Limited (for short “SGL”), the Transferee Company.

3. Shorn of unnecessary details, the facts material for the adjudication of  

these appeals may be stated thus:

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SGL  was  incorporated  on  25th June,  1965  as  a  private  limited  

company, and thereafter, on 16th April, 1991 became a public company. The  

appellant  company  viz.  Sesa  Industries  Ltd.  (for  short  “SIL”)  was  

incorporated  on  17th May,  1993  as  a  subsidiary  of  SGL  with  the  latter  

holding 88.85% of the shares in the former.  

4. On 26th July, 2005, a resolution was passed by the Board of Directors of  

SIL to amalgamate SIL with SGL, effective from             1st April, 2005.  

In pursuance thereof, on 12th January, 2006, SIL and SGL filed respective  

company applications  in  the  Bombay High Court  seeking the  Court’s  

permission to convene a general body meeting.  

5. Respondent No. 1 herein, holder of 0.29% of the shares in SIL, filed an  

affidavit  on  18th January,  2006  intervening  in  the  afore-mentioned  

company petitions. Subsequently, on 6th March, 2006, respondent No. 1  

also filed a  letter  dated 17th February,  2006 issued by the Director  of  

Inspection and Investigation, Ministry of Company Affairs, Government  

of  India,  respondent  No.3  herein,  addressed  to  the  Regional  Director,  

respondent No.2 in these appeals, together with a copy of the inspection  

report under Section 209A of the Companies Act, 1956 (for short “the  

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Act”). At this juncture, it would be useful to extract relevant portion of  

the said report, which reads as follows:

“It will be apparent from the various findings of the Inspection  Report that the entire control of the day to day working of the  company  is  being  managed  by  Mitsui  &  Co.  Ltd.,  Japan  whereby huge  turnover  and profits  are  being  siphoned  away  through  systematic  under  invoicing  of  international  financial  transactions and over invoicing of import of coal. As regards  inter-se  transactions  between  SGL & SIL,  systematic  efforts  have been made by SGL to put SIL into weal financial position  by siphoning of the funds from SIL to SGL by over invoicing  the  price  of  iron  ore  and  coke.  In  the  process  the  minority  shareholders  of  SIL  have  been  deprived  of  their  reasonable  return in the forms of dividend or gains out of fair price of its  shares.  The  minority  shareholders  of  (sic)  SIL  have  been  cheated through the systematically siphoning the funds by SGL  to the ultimate holding company i.e.  M/s Mitsui & Co. Ltd.,  Japan. The I.O. has suggested for redressal of grievances of SIL  by SGL in rescinding (sic.) the contract of purchase of shares at  under value price of Rs. 30/- per share.”

6. Ignoring the objections raised by respondent No.1, vide order dated 18th  

March, 2006, the High Court, allowed SIL and SGL to convene meetings  

for  seeking  approval  of  shareholders  for  the  said  amalgamation,  and  

directed the companies to disclose, as part of the Explanatory Statement  

to be sent with individual notices, the following observations from the  

inspection report:

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“The  Central  Government  has  issued  a  letter  dated  17th  February, 2006 to various governmental agencies including the  Regional  Director  (Western  Region)  enclosing  a  copy of  the  inspection report  and recording that  during the course of the  inspection the inspecting officer has pointed out contraventions  of  Section  269  read  with  Section  198/309,  contravention  of  Section 289 read with Article no. 111 and 140 of the Articles,  contravention of Section 260 and 313, contravention of Section  268 read with Section 256 and contravention of Section 628 of  the Act. The Investigating Officer has suggested invoking the  provisions of Section 397 and 398 read with Section 388B, 401,  402 and 406 of the Act including that of Section 542 of the Act.  The  Inspection  report  has  also  pointed  out  financial  irregularities and also examined the complaints of Mrs. Kalpana  Bhandari and Mrs. Krishna H. Bajaj which have been reported  in Part “A” of the Inspection Report. Contravention of Section  297 of the Act has been reported in Part “B” of the Inspection  Report. It has also been suggested Part “D” of the Inspection  Report for references to be made to the Ministry of Finance and  SEBI. Accordingly, the Central Government has requested the  addressees to examine the report and take appropriate action.”

7. Thereafter, on 8th May, 2006, the shareholders of SIL and SGL, by 99%  

majority,  approved the scheme of amalgamation,  and respondent No.1  

was the sole shareholder who objected to the said scheme. SIL and SGL  

both  filed  petitions  in  the  High  Court  for  according  approval  to  the  

amalgamation scheme.  

8. On 10th August, 2006, the Registrar of Companies, Goa filed an affidavit  

as the delegate of the Regional Director stating that SIL and SGL were  

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inspected under Section 209A of the Act by the Inspecting Officers of the  

Ministry of Company Affairs during the year 2005 and “any violation  

which may be noticed during the course of inspection, there will be no  

dilution for initiating legal action under the Act and that will not in any  

way affect the amalgamation”. The Registrar stated save and except the  

observations in para 4 of the affidavit, which included forwarding of two  

complaints received from respondent No.1, he had no objection to the  

scheme of amalgamation.

9. On the same day, Official Liquidator, respondent No.1 in these appeals,  

also filed a report in the High Court, inter alia, stating that in light of the  

Auditor’s report dated 2nd August 2006, according to him the affairs of  

the transferor company have not been conducted in a manner prejudicial  

to the interest of its members or the public. Respondent No.1 filed an  

affidavit objecting to the sanctioning of the scheme.

10.On 24th August, 2006 respondent No. 1 filed Application No. 56 of 2006  

praying for production and/or inspection of some documents, including  

joint valuation report submitted by M/s. N.M. Raiji and M/s. Hairbhakti  

& Co.; the aforementioned Inspection Report relating to SGL and SIL,  

and issuance of notice to the Bombay Stock Exchange and the National  

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Stock  Exchange;  the  Ministry  of  Company  Affairs  and  the  Central  

Government.  On  9th February,  2009,  while  partly  allowing  the  said  

application the Company Court directed SGL and SIL to place on record  

the joint valuation reports, the proxy register alongwith relevant proxies  

held on 8th May, 2006. However, as regards other prayers, the application  

was  dismissed.  Being aggrieved,  respondent  No.1  preferred  an  appeal  

before  the  Division  Bench.  Vide  order  dated  25th April,  2007,  the  

Division  Bench  dismissed  the  appeal  preferred  by  respondent  No.1,  

observing that:

“We have gone through the two reports. We are of the opinion  that the learned Company Judge should take into consideration  the said reports before passing any final orders in the matter of  approving the scheme of amalgamation of the two companies  for considering the purpose of it  relevancy,  in order to grant  approval.”

11.Thereafter, respondent No.1 filed yet another Company Application No.  

24 of 2007, praying that the reports dated 17th February, 2006 and 20th  

March, 2006 sent to the Regional Director by the Ministry of Company  

Affairs be furnished to her. Vide order dated 13th July, 2007, the Single  

Judge allowed the application. Being aggrieved, SIL preferred an appeal  

before the Division Bench. Admitting the appeal, vide order dated 23rd  

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August, 2007, the Division Bench granted interim stay of the order dated  

13th July, 2007.  The order reads:

“Perusal  of  the  impugned order,  however,  nowhere  discloses  consideration  of  the  said  aspect  of  the  relevancy  of  the  document  for  the  purpose  of  deciding  the  issue  relating  to  amalgamation of the company. We, however, make it clear that  the  process  regarding  amalgamation  shall  proceed  further  in  accordance with the provisions of law and in terms of direction  in order dated 25.4.07 regarding relevancy of the said report.”

12.Finally, vide judgment dated 18th December, 2008,  the learned Company  

Judge sanctioned the scheme of amalgamation between SGL and SIL,  

inter alia, observing that: (i) since inspection proceedings under Section  

209A of the Act are different from an investigation carried out in terms  

of Section 235 of the Act, they are not required to be disclosed under the  

proviso to Section 391 of the Act; (ii) in any event, SIL and SGL have  

not suppressed any material facts as the letter dated 17th February, 2006  

was made part  of  the individual  notices  sent  to the  shareholders;  (iii)  

inspections carried out under Section 209A of the Act cannot come in the  

way of sanctioning of amalgamation, as they can only result in criminal  

prosecution of those responsible for contravention of various Sections of  

the  Act;  (iv)  three  years  have  elapsed  since  the  inspections  but  the  

Central  Government has not  taken any further  actions in terms of the  

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inspection reports, which shows that investigations or action in terms of  

Section 401 of the Act was not in the offing; (v) the Central Government  

has, through the Regional Director, clarified that the merger would not  

come in the way of any action to be taken pursuant to the two inspection  

reports,  (vi)  non-disclosure of  pending criminal  complaints  is  also not  

fatal  to  sanctioning  of  the  scheme  as  the  Objector  did  not  raise  this  

contention earlier; pendency of criminal complaints cannot be equated to  

“material facts” in terms of the proviso to Section 391 of the Act and the  

merger  will  have  no  effect  on  the  criminal  complaints;  (vii)  merely  

because the Registrar has failed to perform his duties, it cannot be said  

that the scheme of amalgamation, which has been approved by a majority  

of the shareholders, should be rejected; (viii) the onus is on the Objector  

to prove that a scheme is contrary to public interest and is not just, fair  

and reasonable, and in the instant case, the Objector has not discharged  

the burden cast on her; (ix) the objection in relation to the share valuation  

was not  well-founded in as  much as the  Objector  has not  placed any  

material  to  show  that  the  valuation  was  unfair,  especially  when  an  

overwhelming  majority  of  shareholders  have  approved  the  share  

valuation; (x) violation of Section 73 of the Act is not sufficient to stall  

an  amalgamation  as  the  persons  responsible  for  the  violation  can  be  

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effectively dealt with even after the merger and (xi) the objection that the  

proposed  scheme  is  unconscionable  deserves  to  be  rejected,  as  the  

scheme has been approved by majority of the shareholders, as also the  

Central Government. The learned Judge also clarified that the sanctioning  

of  the  scheme  will  not  come  in  the  way  of  either  civil  or  criminal  

proceedings which may be initiated pursuant to the inspection reports as  

well as further progress of criminal complaints filed by the objector.

13.Aggrieved,  respondent  No.1  preferred  an  intra-court  appeal  before  a  

Division Bench of the Court. The Division Bench has, vide the impugned  

judgment, set aside the order of the learned Single Judge and revoked the  

sanction to the amalgamation scheme. The division bench has, inter-alia,   

observed  that:  (i)  when  serious  irregularities  have  been  found  in  the  

inspection  report  and  when  the  proceedings  on  the  basis  of  the  said  

inspection report are still pending and no further decision has been taken  

in this behalf and the Registrar as a delegate of the Regional Director  

who was in possession of such inspection report, should not have filed  

affidavits both, as the Official Liquidator as well as the Registrar as the  

delegate  of  the  Regional  Director;  (ii)  once  it  is  found  that  the  

report/affidavit  on  behalf  of  the  Registrar/Regional  Director  is  not  in  

conformity with the statutory provisions, this Court mechanically cannot  

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sanction the scheme simply because the majority of the shareholders have  

approved the scheme and the majority shareholders in their wisdom have  

accepted  the  valuation  regarding  exchange  ratio;   (iii)  as  per  the  

provisions of Section 393, the Registrar as well as the Liquidator, both  

are  required  to  submit  their  separate  reports  and  both  are,  therefore,  

functioning in a different capacity. It is surprising as to how the Official  

Liquidator who was the incharge of the Registrar could have filed the  

affidavits one in the capacity as a delegate of the Regional Director and  

the other in the capacity as the Official Liquidator;  (iv) the Affidavit of  

the Registrar is absolutely noncommittal. In the affidavit of the Official  

Liquidator,  he  has  mentioned  that  the  affairs  of  the  company are  not  

being conducted in a manner prejudicial to the interests of its members or  

to public interest. But when the same person filed affidavit as Registrar,  

this aspect is clearly omitted in his reply and (v) the learned Company  

Judge himself has found that from the stand taken by the Registrar, he  

has failed in his duty and it cannot be said that the requirement of Section  

394 has been complied with. In fact, two contradictory affidavits have  

been filed by the same gentleman, one in his capacity as the delegate of  

the  Regional  Director  and  the  other  in  his  capacity  as  the  Official  

Liquidator. When the law requires that there should be two independent  

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reports, it is clear that the statutory provision has not been complied with.

14.Hence these appeals by SIL.

15.We heard Mr. K.K. Venugopal, Senior Advocate for the appellant, Mr.  

H.P. Raval,  learned Additional Solicitor  General of India on behalf of  

respondent Nos.2 to 4 and Mr. Amar Dave, learned Advocate on behalf  

of respondent No.1 at considerable length.

16.Mr. K.K. Venugopal, learned senior counsel strenuously urged that once  

a  scheme  of  amalgamation  has  been  approved  by  a  majority  of  the  

shareholders  after  sufficient  disclosure  in  the  explanatory  statement  

regarding the pendency of an inspection under Section 209A of the Act,  

it is neither expedient nor desirable for Courts to sit in judgment over a  

commercial  decision  of  the  shareholders.  Relying  on  the  decisions  in  

Reliance Petroleum Ltd.,  In re1,  Programme Asia Trading Company  

Limited,  In  re2 and  Core  Health  Care  Ltd.,  In  re3, learned  counsel  

contended that it is settled that pendency of an inspection under Section  

209A or  under  Section  235  of  the  Act  should  not  stall  a  scheme  of  

amalgamation.  

1 [2003] 46 SCL 38 (Guj) 2 [2005] 125 Comp Cas 297 (Bom) 3 [2007] 138 Comp Cas 204 (Guj)

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17.Learned counsel submitted that the Division Bench erred in rejecting the  

scheme of amalgamation on the sole ground that the requirement of the  

first proviso to Section 394(1) of the Act has not been complied with, as  

it is settled that the said proviso only applies to the amalgamation of a  

company which is being wound up.  Learned counsel stressed that in the  

instant case, the prayer in the amalgamation petition was for “dissolution  

without winding up” and hence only the second proviso to Section 394(1)  

was  applicable.  Relying  on  the  decisions  of  this  Court  in  Regional   

Director,  Company  Law  Board,  Government  of  India  Vs.  Mysore  

Galvanising  Co.  Pvt.  Ltd.  &  Ors.4,  Sugarcane  Growers  &  Sakthi   

Sugars Shareholders’ Association  Vs.  Sakthi Sugars Ltd.5, Marybong  

and  Kyel  Tea  Estate  Ltd.,  In  re6 and  Mathew  Philip  &  Ors.  Vs.   

Malayalam Plantations (India) Ltd. & Anr.7, learned counsel contended  

that the use of the word “further” in the second proviso to Section 394(1)  

of  the  Act  does  not  indicate  that  the  said  proviso  is  an  additional  

provision in relation to the situation contemplated under the first proviso.  

4 [1976] 46 Comp Cas 639 (Kar) 5 [1998] 93 Comp Cas 646 (Mad) 6 [1977] 47 Comp Cas 802 (Cal) 7 [1994] 81 Comp Cas 38 (Ker)

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18.While pointing out that the current investigation under Section 235 of the  

Act  was  initiated  in  July,  2009,  after  the  impugned  judgment  was  

delivered  and  was  based  on  a  fresh  complaint  by  respondent  No.1,  

learned counsel urged that these investigations are at a preliminary stage  

of mere allegations and the final report/accusation, if any, the trial, its  

outcome and appeals  etc.,  would  all  be  a  long  drawn process,  which  

cannot hold up the amalgamation, as was opined by the Company Judge.  

Learned  counsel  argued  that  the  said  finding  of  the  Company  Judge  

having not been disturbed by the appellate bench, the same has attained  

finality. Drawing an analogy with cases under the Election laws, learned  

counsel pleaded that unless a person is convicted, no adverse inference  

can be drawn against him.  In support of the proposition, reliance was  

placed  on  the  decision  of  this  Court  in  Ranjitsing  Brahmajeetsing  

Sharma Vs. State of Maharashtra & Anr.8.  

19.Reliance was placed on the decisions in  Search Chem Industries Ltd.,   

In re9 and Banaras Beads Ltd., In re10 to contend that the pendency of  

the investigation cannot come in the way of amalgamation in as much as  

even if the allegations are found to be true, the same will lead only to a  

8 (2005) 5 SCC 294 9 [2006] 129 Comp Cas 471 (Guj) 10 [2006] 132 Comp Cas 548 (All)

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report under Section 241 of the Act and ultimately a prosecution under  

Section  242  of  the  Act  against  the  Directors/Principal  officers  of  the  

company, which would not dilute or affect the scheme of amalgamation.  

20.Highlighting  the  advantages  of  the  amalgamation,  learned  counsel  

submitted that SIL being a subsidiary of SGL, the amalgamation between  

both  the  said  companies  would  entail  several  benefits  for  both  the  

companies,  including  consolidation  of  the  management,  control  and  

operation of both companies thereby resulting in considerable savings by  

elimination  of  duplication  of  administrative  expenses  etc.   Moreover,  

according to the learned counsel, the shareholders of SIL, including the  

appellant, will also stand to gain tremendously by allotment of shares of  

SGL,  a  very  healthy  company.  As per  the  amalgamation  scheme,  the  

shareholders of SIL will get one share of SGL against five shares held by  

them in SIL.  Learned counsel submitted that 99.68% of the shareholders  

of both the appellants, viz. SIL and SGL having approved the scheme,  

allowing a scheme of amalgamation to be stalled due to the pendency of  

an  investigation  or  inspection  would  lead  to  a  situation  whereby  any  

scheme  for  amalgamation  can  be  held  to  ransom  by  a  minority  

shareholder,  like  in  the  instant  case,  where  the  first  

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respondent/complainant  had  voluntarily  offloaded  5,31,950  shares  

pursuant to a voluntary offer made by SGL out of total 5,89,400/- shares  

held by him in SIL.

21.Assailing the observation of the appellate Bench that the same person  

viz. the Registrar of Companies ought not to have filed both Affidavits  

himself  as  delegate  of  Regional  Director  as  well  as  the  Official  

Liquidator,  learned counsel urged that as Section 448(1)(a) of the Act  

contemplates the possibility of part time Official Liquidators, there was  

nothing  improper  in  the  approach  of  the  Registrar  in  as  much as  the  

Registrar had filed both the affidavits on 10th August, 2006, and the same  

had  to  be  read  together,  which  disclosed  all  relevant  materials.  

Additionally, it  was urged that the Single Judge had rightly concluded  

that a scheme of amalgamation, which is just and fair, cannot be rejected  

merely because the Official Liquidator had failed in his duty in placing  

the correct position before the Court.  

22.Learned counsel then submitted that in  Life Insurance Corporation of   

India Vs. Escorts Ltd. & Ors.11, this Court had held that the functioning  

11 (1986) 1 SCC 264

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of a company was akin to that of a parliamentary democracy wherein the  

overall control is exercised by the majority of the shareholders. In the  

instant  case,  majority of the shareholders had approved the scheme of  

amalgamation despite having full knowledge of the proceedings against  

the Companies and the prima facie findings. Moreover, Section 395 of  

the  Act  provides  the  power  to  acquire  shares  of  the  shareholders  

dissenting from the scheme if the said scheme has been approved by the  

holders of not less than nine-tenth in value of the shares of whose transfer  

is involved.  

23.Mr. Raval, the learned Additional Solicitor General, on the other hand,  

relying  on  a  decision  of  the  Gujarat  High  Court  in  Wood  Polymer  

Limited,  In re12,  submitted  that  since  the  sanctioning  of  a  scheme of  

amalgamation  has  the  effect  of  imposing  it  on  dissenting  members,  

before exercising the power conferred on it by Section 391(2) of the Act,  

the  Court  needs  to  examine  the  scheme  in  its  proper  perspective.  

Learned  counsel  urged  that  it  cannot  be  argued  that  merely  because  

statutory formalities are duly carried out, the Court has no option but to  

sanction  the  scheme.   Learned  counsel  also  submitted  that  since  

inspection reports had been received by the Registrar of Companies and  12 [1977] 47 Comp Cas 597

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Official  Liquidator,  respectively  on  19th October,  2006  and  15th  

November, 2006, i.e. after the filing of affidavit by them on 10th August,  

2006,  under Section 394 of  the Act,  no fault  can be found with their  

affidavits.  It was asserted that since serious irregularities had been found  

in the affairs of both SGL and SIL, cheating the minority shareholders of  

SIL, the order sanctioning amalgamation of the said companies cannot be  

permitted to be used for thwarting the investigations.  Thus, the learned  

Additional Solicitor General supported the impugned order.

24.Mr.  Amar  Dave,  learned  counsel  appearing  for  respondent  No.1,  

contended that the provisions of Chapter V of Part VI of the Act were  

intended to introduce a system of checks and balances to promote the  

interests of shareholders, creditors and society at large so as to promote a  

healthy corporate  governance culture,  and the  Courts  should adopt  an  

interpretation that advances this object.

25.Learned counsel urged that in the instant case the provisions of Section  

393(1)(a)  of  the  Act  had  not  been  complied  with  in  as  much  as  all  

material facts were not placed before the shareholders, in particular the  

preliminary letters of findings addressed to the Managing Director of SIL  

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by the Inspector pursuant to the inspection under Section 209A of the Act  

on  28th September,  2005.   According  to  the  learned  counsel,  a  mere  

enclosure  of  an  extract  of  covering  letter  dated  17th February,  2006  

cannot be construed as sufficient compliance with the mandate of Section  

393(1)(a), as the said letter did not disclose the details of the findings to  

the effect that the affairs of the company had been conducted in a manner  

which was prejudicial  to the interests  of  its  members.  Relying  on the  

decision of this Court in  Miheer H. Mafatlal  Vs.  Mafatlal  Industries  

Ltd.13, learned counsel contended that sufficient information had not been  

disclosed to the shareholders so as to enable them to take an informed  

decision.

26.Learned  counsel  contended  that  in  light  of  the  dictum  laid  down  in  

Miheer H. Mafatlal  (supra);  Bedrock Ltd., In re14 and  T. Mathew  Vs.   

Smt. Saroj G. Poddar15, the companies had violated the provisions of the  

proviso to Section 391(2) of the Act in as much as SIL and SGL had not  

disclosed  the  pendency  of  the  criminal  proceedings  against  the  

companies and its directors, and of proceedings under Section 209A of  

the Act. Learned counsel submitted that proceedings under Section 209A  

13 (1997) 1 SCC 579 14 [2000] 101 Comp Cas 343 (Bom) 15 [1996] 22 CLA 200 (Bom)

1

of the Act would fall under the category “and of the like” as mentioned in  

the proviso to Section 391(2) of the Act, as every material  fact which  

could  affect  the  Company  Court’s  discretion  has  to  be  disclosed.  

Moreover,  both  the  Companies  had  not  disclosed  the  final  inspection  

reports  under Section 209A of the Act,  and the same was brought on  

record by respondent No.1. Learned counsel further submitted that the  

petitioner has failed to disclose even before this Court, that the Serious  

Fraud Investigation Office (SFIO) was conducting an investigation into  

the affairs of the company under the provisions of Section 235 of the Act,  

and  even  though  the  said  investigation  proceedings  arose  later,  the  

obligation under the proviso of Section 391(2) is a continuing obligation  

and, therefore, the appellant was obliged to disclose the same before this  

Court as well.

27.Learned  counsel  strenuously  urged  that  the  reports  submitted  by  the  

Registrar as delegate of the Regional Director and as Official Liquidator  

were clearly in violation of the mandate of the proviso to Section 394(1)  

of the Act, in as much as despite being in possession of the inspection  

reports prepared by the Inspecting Officer of the Ministry of Company  

Affairs,  the  Official  Liquidator  filed  a  misleading affidavit  before the  

1

Company Court,  reporting “that  the affairs  of the transferor Company  

were not being conducted in a manner prejudicial to the interests of its  

members  or  to  the  public  interest”.  It  was  alleged  that  the  affidavit  

submitted by the Official Liquidator was solely based on the report of  

one M/s S.R. Kenkre & Associates, Chartered Accountants, who in turn  

had  based  their  entire  report  on  the  information  supplied  by  the  

Company, without any independent verification. Relying on the decisions  

in  Securities  and  Exchange  Board  of  India  Vs.  Sterlite  Industries  

(India) Ltd.16; Modus Analysis and Information P. Ltd. & Ors, In re17;   

Miheer H. Mafatlal (supra); Larsen and Toubro Limited, In re18; Wood  

Polymer (supra) and T. Mathew (supra), learned counsel argued that the  

Division Bench had rightly concluded that the mandate of Section 394  

had not been complied with thereby raising a statutory embargo on the  

approval of the scheme of amalgamation.  Further, the disclosure of all  

material information to the shareholders, which included the pendency of  

criminal proceedings; inspection proceedings under Section 209A of the  

Act, and proceedings under Section 235 of the Act in the report of the  

Official  Liquidator  under  Section  394(1)  of  the  Act  constitute  

jurisdictional  requirements,  and  unless  all  of  them were  satisfied,  the  

16 (2003) 113 Comp Cas 273 17 (2008) 142 Comp Cas 410 (Cal) 18 (2004) 121 Comp Cas 523

2

Company Court had no jurisdiction to sanction the scheme.  In support,  

reliance was placed on the decision of  this  Court  in  Carona Ltd.  Vs.   

Parvathy Swaminathan & Sons19.

28.Learned counsel then contended that the fact of huge siphoning off the  

funds  from  the  transferor  company  (SIL)  to  the  transferee  company  

(SGL) being within the knowledge of the Company Court, it should not  

have sanctioned the scheme, as the distinction between the wrongdoer  

and the beneficiary gets effaced due to sanctions of law. Learned counsel  

also argued that under the attending circumstances the swap ratio of 1  

share of the transferee company for 5 shares of the transferor company  

was also unfair, especially when the valuers did not have an opportunity  

to examine the inspection reports under Section 209A of the Act.  

29.Reliance  was  placed  on the  decisions  in  J.S.  Davar & Anr.  Vs.  Dr.  

Shankar  Vishnu  Marathe  &  Ors.20;  T.  Mathew  (supra);  Calcutta  

Industrial Bank Ltd., In re21 and Travancore National & Quilon Bank  

Ltd.,  In re22,  to contend that the proposed scheme was a ruse to stifle  

19 (2007) 8 SCC 559 20 A.I.R. 1967 Bom. 456 21 [1948] 18 Comp Cas 144 22 A.I.R. 1940 Mad 139

2

further inquiry into the affairs of the transferor and transferee company  

and  their  managements  which  have  been  initiated  by  the  Ministry  of  

Company Affairs, as also criminal and civil proceedings that may arise  

thereafter  because  after  the  amalgamation,  it  may  not  be  possible  to  

initiate any proceedings against the transferor company as it would cease  

to exist. Moreover, the proceedings under Sections 244, 397, 398, 401,  

402, 406 and 542 of the Act against the transferor company cannot be  

initiated against the transferee company even if the transferee company  

has  undertaken  to  take  over  all  the  future  liabilities  of  the  transferor  

company.   Learned  counsel  thus,  asserted  that  in  light  of  the  serious  

findings in the inspection report under Section 209A of the Act, sanction  

of the scheme would be detrimental to public interest, more so when on  

sanction of the scheme of amalgamation, the transferor company would  

cease to exist, losing its entity and in the process its functionaries will go  

scot free.

30.Relying on Miheer H. Mafatlal  (supra), learned counsel contended that  

the proposed scheme of amalgamation was unconscionable, in as much  

as  the  minority  shareholders  of  the  transferor  company  have  been  

oppressed,  and  in  fact  the  “exit  option”  offered  by  the  transferee  

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company to the minority shareholders of transferor company on 5th June  

2003, at an extremely undervalued price of ` 30 per share was in violation  

of Section 395 of the Act.

31.Lastly, learned counsel urged that though the decision of the majority of  

the  shareholders,  while  sanctioning  the  scheme,  is  of  paramount  

importance,  but  in  the  instant  case,  since  99.80% of  the  votes  of  the  

transferor  company  were  those  of  the  transferee  company  itself,  the  

significance of the majority decision was of no relevance and, therefore,  

under these circumstances the Company Court was required to ensure  

that the rights of the minority were not trammeled upon, as observed in  

Miheer H. Mafatlal  (supra);  Bedrock Ltd.  (supra);  T. Mathew  (supra);  

J.S. Davar (supra)  and Calcutta Industrial Bank Ltd. (supra).

32.Before  addressing  the  issues  raised,  it  will  be  useful  to  survey  the  

relevant provisions contained in Chapter V of Part VI of the Act, which  

deal  with  “Arbitrations,  compromises,  arrangements  and  

reconstructions”.   Section  391 of  the  Act,  clothes  the  Court  with  the  

power to sanction a compromise or arrangements made by a company  

with its creditors and members.  It reads as follows:-

2

“S.391.Power  to  compromise  or  make  arrangements  with  creditors  and  members.—(1)  Where  a  compromise  or  arrangement is proposed—

(a) between  a  company  and  its  creditors  or  any  class  of  them; or

(b) between  a  company  and  its  members  or  any  class  of  them;

the Court  may,  on the application of the company or  of any  creditor or member of the company, or in the case of a company  which is being wound up, of the liquidator, order a meeting of  the creditors or class of creditors, or of the members or class of  members, as the case may be, to be called, held and conducted  in such manner as the Court directs.

(2) If a majority in number representing 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 Court, 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  Court  unless  the  Court  is  satisfied  that  the  company or  any other  person by whom an  application has been made under sub-section (1) has disclosed  to the Court, 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  

2

relation  to  the  company under  Sections  235 to  251,  and the  like.”

Section  394  of  the  Act,  lays  down  the  procedure  for facilitating  

reconstruction and amalgamation of companies.  It reads as under:

“S.394.  Provisions  for  facilitating  reconstruction  and  amalgamation  of  companies.—(1)  Where  an  application  is  made to the Court under Section 391  for the sanctioning of a  compromise or arrangement proposed between a company and  any such persons  as  are  mentioned  in  that  section,  and it  is  shown to the Court—

(a) that  the compromise or arrangement has been proposed  for the purposes of, or in connection with, a scheme for  the reconstruction of any company or companies, or the  amalgamation of any two or more companies; and

(b) that  under  the  scheme  the  whole  or  any  part  of  the  undertaking,  property  or  liabilities  of  any  company  concerned in the scheme (in this section referred to as a  ‘transferor  company’)  is  to  be  transferred  to  another  company (in  this  section  referred  to  as  ‘the  transferee  company’);

the Court may, either by the order sanctioning the compromise  or arrangement or by a subsequent order, make provision 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  compromise  or  arrangement,  are to be allotted or  appropriated  by that  company to or for any person;

2

(iii) the continuation by or against the transferee company of  any  legal  proceedings  pending  by  or  against  any  transferor company;

(iv)  the  dissolution,  without  winding  up,  of  any  transferor  company;

(v) the  provision to  be made  for  any persons  who,  within  such  time  and  in  such  manner  as  the  Court  directs,  dissent from the compromise on arrangement; and

(vi) such incidental, consequential and supplemental matters  as  are  necessary  to  secure  that  the  reconstruction  or  amalgamation shall be fully and effectively carried out:

Provided that no compromise or arrangement proposed for the  purposes of,  or  in  connection  with,  a  scheme  for  the  amalgamation of a company, which is being wound up, with  any other  company or companies,  shall  be sanctioned by the  Court unless the Court has received a report from the Company  Law Board or the Registrar that the affairs of the company have  not been conducted in a manner prejudicial to the interests of its  members or to public interest:

Provided  further that  no  order  for  the  dissolution  of  any  transferor  company  under  clause  (iv)  shall  be  made  by  the  Court  unless  the  Official  Liquidator  has,  on  scrutiny  of  the  books and papers of the company, made a report to the Court  that the affairs of the company have not been conducted in a  manner prejudicial to the interests of its members or to public  interest. …………………………………………………………………”

33.It  is  plain  from the afore-extracted  provisions  that  when a  scheme of  

amalgamation/merger  of  a  company is  placed before the Court  for its  

sanction, in the first instance the Court has to direct holding of meetings  

in the manner stipulated in Section 391 of the Act.  Thereafter before  

sanctioning such a scheme, even though approved by a majority of the  

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concerned members or creditors,  the Court has to be satisfied that the  

company or any other person moving such an application for sanction  

under sub-section (2) of Section 391 has disclosed all the relevant matters  

mentioned in the proviso to the said sub-section.  First proviso to Section  

394 of the Act stipulates that no scheme of amalgamation of a company,  

which is being wound up, with any other company, shall be sanctioned  

by the Court unless the Court has received a report from the Company  

Law Board or the Registrar to the effect that the affairs of the company  

have not been conducted in a manner prejudicial to the interests of its  

members  or  to  public  interest.   Similarly,  second proviso  to  the  said  

Section  provides  that  no  order  for  the  dissolution  of  any  transferor  

company under clause (iv) of sub-section (1) of Section 394 of the Act  

shall be made unless the official liquidator has, on scrutiny of the books  

and papers of the company, made a report to the Court that the affairs of  

the  company have not  been conducted in  a  manner  prejudicial  to  the  

interests of its members or to public interest.  Thus, Section 394 of the  

Act casts an obligation on the Court to be satisfied that the scheme of  

amalgamation or merger is not prejudicial to the interest of its members  

or to public interest.

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34.Therefore, while it is trite to say that the court called upon to sanction a  

scheme of amalgamation would not act as a court of appeal and sit in  

judgment over the informed view of the concerned parties to the scheme,  

as the same is best left to the corporate and commercial wisdom of the  

parties concerned, yet it is clearly discernible from a conjoint reading of  

the  aforesaid  provisions  that  the  Court  before  whom  the  scheme  is  

placed, is not expected to put its seal of approval on the scheme merely  

because  the  majority  of  the  shareholders  have  voted  in  favour  of  the  

scheme.  Since the scheme which gets sanctioned by the court would be  

binding on the dissenting minority shareholders or creditors, the court is  

obliged to examine the scheme in its proper perspective together with its  

various  manifestations  and  ramifications  with  a  view  to  finding  out  

whether the scheme is fair, just and reasonable to the concerned members  

and is not contrary to any law or public policy. (See:  Hindustan Lever  

Employees Union Vs. Hindustan Lever Ltd. & Ors.23).  The expression  

“public policy” is not defined in the Act.  The expression is incapable of  

precise definition.  It connotes some matter which concerns the public  

good  and  the  public  interest.  (See:  Central  Inland  Water  Transport   

Corporation Limited & Anr. Vs. Brojo Nath Ganguly & Anr.24.)

23 1995 Supp (1) SCC 499 24 (1986) 3 SCC 156

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35. In  Miheer  H.  Mafatlal  (supra),  this  Court  had,  while  examining the  

scope and ambit  of jurisdiction of the Company Court,  culled out the  

following broad contours of such jurisdiction:

“1. The sanctioning court has to see to it that all the requisite  statutory  procedure  for  supporting  such  a  scheme  has  been  complied with and that the requisite meetings as contemplated  by Section 391(1)(a) have been held.

2. That  the  scheme  put  up  for  sanction  of  the  Court  is  backed up by the requisite majority vote as required by Section  391 sub-section (2).

3. That the meetings concerned of the creditors or members  or  any class  of  them had the relevant  material  to enable  the  voters  to  arrive  at  an  informed  decision  for  approving  the  scheme in question. That the majority decision of the concerned  class of voters is just and fair to the class as a whole so as to  legitimately bind even the dissenting members of that class.

4. That  all  necessary  material  indicated  by  Section  393(1)(a) is placed before the voters at the meetings concerned  as contemplated by Section 391 sub-section (1).

5. That  all  the  requisite  material  contemplated  by  the  proviso of sub-section (2) of Section 391 of the Act is placed  before the Court by the applicant concerned seeking sanction  for such a scheme and the Court gets satisfied about the same.

6. That  the  proposed  scheme  of  compromise  and  arrangement is not found to be violative of any provision of law  and is not contrary to public policy. For ascertaining the real  purpose underlying the scheme with a view to be satisfied on  this  aspect,  the  Court,  if  necessary,  can  pierce  the  veil  of  apparent  corporate  purpose  underlying  the  scheme  and  can  judiciously X-ray the same.

7. That  the  Company Court  has  also to  satisfy  itself  that  members or class of members or creditors or class of creditors,  as the case may be, were acting bona fide and in good faith and  

2

were not coercing the minority in order to promote any interest  adverse to that of the latter comprising the same class whom  they purported to represent.

8. That the scheme as a whole is also found to be just, fair  and  reasonable  from  the  point  of  view  of  prudent  men  of  business taking a commercial  decision beneficial  to the class  represented by them for whom the scheme is meant.

9. Once  the  aforesaid  broad  parameters  about  the  requirements of a scheme for getting sanction of the Court are  found  to  have  been  met,  the  Court  will  have  no  further  jurisdiction to sit in appeal over the commercial wisdom of the  majority of the class of persons who with their open eyes have  given their approval to the scheme even if in the view of the  Court there would be a better scheme for the company and its  members  or  creditors  for  whom the  scheme  is  framed.  The  Court cannot refuse to sanction such a scheme on that ground as  it  would  otherwise  amount  to  the  Court  exercising  appellate  jurisdiction  over  the  scheme  rather  than  its  supervisory  jurisdiction.”

36.It  is  manifest  that  before  according  its  sanction  to  a  scheme  of  

amalgamation, the Court has to see that the provisions of the Act have  

been duly complied with; the statutory majority has been acting bona fide  

and in good faith and are not coercing the minority in order to promote  

any interest adverse to that of the latter comprising the same class whom  

they purport  to  represent  and the  scheme as a  whole  is  just,  fair  and  

reasonable  from  the  point  of  view  of  a  prudent  and  reasonable  

businessman taking a commercial decision.  

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37.Thus,  the  first  question  is  as  to  whether  the  appellant  and  SGL  had  

disclosed sufficient information to the shareholders so as to enable them  

to  arrive  at  an  informed  decision?   The  proviso  to  Section  391  (2)  

requires a company to “disclose pendency of any investigation in relation  

to the company under Sections 235 to 351, and the like”.  Though it is  

true that inspection under Section 209A of the Act, strictly speaking, may  

not be in the nature of an investigation, but at the same time it cannot be  

construed as an innocuous exercise for record, in as much as if anything  

objectionable or fraudulent in the conduct of the affairs of the company is  

detected during the course of inspection, it may lay the foundation for the  

purpose of investigations under Sections 235 and 237 of the Act, as is the  

case here.  Therefore, existence of proceedings under Section 209A must  

be disclosed in terms of the proviso to Section 391(2).  In any event, we  

are of the opinion that since the said issue is a question of fact, based on  

appreciation of evidence, and both the Courts below have held that the  

information  supplied  was  sufficient,  particularly  in  light  of  the  order  

passed by the Single Judge on 18th March, 2006, we are not inclined to  

disturb the said concurrent finding of the Courts below, particularly when  

it  is  not  shown  that  the  said  finding  suffers  from  any  demonstrable  

3

perversity.  (See:  Firm Sriniwas Ram Kumar  Vs.  Mahabir  Prasad &  

Ors.25 and Ganga Bishnu Swaika Vs. Calcutta Pinjrapole Society26.)  

38.The next issue that arises for our determination is whether the Division  

Bench  was  correct  in  holding  that  the  affidavit  filed  by  the  Official  

Liquidator was vitiated on account of non-disclosure of all material facts.  

From  a  bare  perusal  of  the  affidavit  dated  10th February,  2006,  it  is  

manifest, ex facie, that before filing the affidavit, the said official had not  

examined and applied its mind to the findings contained in the inspection  

report under Section 209A of the Act.  While it is true that it was not  

within the domain of the Official Liquidator to determine the relvency or  

otherwise  of  the  said report,  yet  he was obliged to incorporate  in his  

affidavit the contents of the inspection report.  We are convinced that the  

official liquidator had failed to discharge the statutory burden placed on  

him under the second proviso to Section 394(1) of the Act.

39.An  Official  Liquidator  acts  as  a  watchdog  of  the  Company  Court,  

reposed  with  the  duty  of  satisfying  the  Court  that  the  affairs  of  the  

company,  being  dissolved,  have  not  been  carried  out  in  a  manner  

prejudicial to the interests of its members and the interest of the public at  

large. In essence, the Official Liquidator assists the Court in appreciating  25 1951 SCR 277 26 AIR 1968 SC 615

3

the other side of the picture before it, and it is only upon consideration  of  

the  amalgamation  scheme,  together  with  the  report  of  the  Official  

Liquidator, that the Court can arrive at a final conclusion that the scheme  

is in keeping with the mandate of the Act and that of public interest in  

general. It, therefore, follows that for examining the questions as to why  

the transferor-company came into existence; for what purpose it was set  

up; who were its promoters; who were controlling it; what object was  

sought  to  be  achieved  by  dissolving  it  and  merging  with  another  

company, by way of a scheme of amalgamation, the report of an official  

liquidator is of seminal importance and in fact facilitates the Company  

Judge to record its  satisfaction as to whether  or not the affairs  of the  

transferor company had been carried on in a manner prejudicial to the  

interest of the minority and to the public interest.

40.In  the  present  case,  we  are  unable  to  appreciate  why  the  Official  

Liquidator, who was aware of the inspection report dated 17th February,  

2006 under Section 209A containing adverse comments on the affairs of  

both  the  companies,  relied  only  on  the  report  of  the  auditors,  which  

admittedly was not even verified.  We can only lament the conduct of the  

official liquidator.

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41.Having held that the Official Liquidator had failed to discharge the duty  

cast on him in terms of the second proviso to Section 394(1) of the Act,  

the next issue that requires consideration is whether sanction of a scheme  

of  amalgamation  can  be  held  up  merely  because  the  conduct  of  an  

Official Liquidator is found to be blameworthy?  We are of the view that  

it will neither be proper nor feasible to lay down absolute parameters in  

this  behalf.  The  effect  of  misdemeanour  on  the  part  of  the  official  

liquidator on the scheme as such would depend on the facts obtaining in  

each case and ordinarily the Company Judge should be the final arbiter  

on that issue. In the instant case, indubitably, the findings in the report  

under Section 209A of the Act were placed before the Company Judge,  

and  he  had  considered  the  same  while  sanctioning  the  scheme  of  

amalgamation. Therefore, in the facts and circumstances of the present  

case, the Company Judge had, before him, all material facts which had a  

direct bearing on the sanction of the amalgamation scheme, despite the  

aforestated lapse on the part of the Official Liquidator. In this view of the  

matter, we are of the considered opinion that the Company Judge, having  

examined all material facts, was justified in sanctioning the scheme of  

amalgamation, particularly when the current investigation under Section  

235 of the Act was initiated pursuant to a complaint filed by respondent  

3

No.1  subsequent  to  the  order  of  the  Company  Judge  sanctioning  the  

scheme.  

42.For the foregoing reasons, the appeals are allowed;  and the impugned  

judgment is set aside.  Consequently, the order passed by the Company  

Judge sanctioning the scheme of amalgamation is restored. However, it is  

made clear that the scheme of amalgamation will not come in the way of  

any civil or criminal proceedings which may arise pursuant to the action  

initiated  under  Sections  209A  or  235  of  the  Act,  or  any  criminal  

proceedings filed by respondent No. 1.  

43.In the facts and circumstances of the case, there will be no order as to  

costs.

.……………………………………               (D.K. JAIN, J.)  

                             .…………………………………….              (H.L. DATTU, J.)

NEW DELHI; FEBRUARY 7, 2011. ARS

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