The Supreme Court of India recently revisited the law on schemes of amalgamation under Sections 391-394 of the Companies Act, 1956 in Sesa Industries v. Krishna Bajaj. The Supreme Court was concerned with a set of appeals by special leave from the judgment of a Division Bench of the Bombay High Court at Panaji. The Division Bench had set aside a judgment of a Single (Company) Judge sanctioning a proposed scheme of amalgamation between the appellant, Sesa Industries Limited (“SIL” or “Appellant”), and another company, Sesa Goa Limited (“SGL”).
The facts in brief were that on 26th July, 2005, the Board of SIL passed a resolution seeking to amalgamate SIL with SGL. Subsequently, SIL and SGL filed company applications in the Bombay High Court seeking permission for convening a general body meeting for the purpose. Krishna Bajaj (“Krishna Bajaj”), holder of 0.29% of the shares in SIL, intervened in these petitions objecting to the amalgamation. He relied on an inspection report under Section 209A of the Companies Act, 1956, where some alleged malpractices, including siphoning of funds, were highlighted. The Single Judge rejected the objections, and allowed SIL and SGL to convene a general body meeting. The Judge also directed a disclosure to be made to the meeting in respect of the Inspection Report.
Following this, a general body meeting was held, and 99% of the shareholders consented to the scheme. SIL and SGL approached the High Court for sanctioning of the scheme. The Registrar of Companies,
Goa, filed an affidavit stating that he had no objections, subject to the fact that the scheme should not result in any dilution of legal action on the basis of the Inspection Report. The Official Liquidator (“OL”) also filed a Report [(as required under the second Proviso to Section 394(1)] that the affairs of the company were not being carried out prejudicial to the interest of the members/public. This report was attacked by the objector to the scheme as being vitiated because of non-application of mind.
By a judgment dated 18th December, 2008, the Company Judge sanctioned the scheme of amalgamation between SGL and SIL. In his decision, he gave detailed reasons after appreciation of the facts as to why the objections were being rejected. This decision was reversed by a Division Bench, inter alia on the grounds that a scheme should not be sanctioned when there was a pending investigation u/s 209A. Further, the Court stated that there was no affidavit by the Registrar that the affairs of the company were not being carried out in a manner prejudicial to the interests of the members/public; and consequently, the first Proviso to Section 394(1) was not complied with. It held that the OL’s report was vitiated, and consequently the second Proviso was not complied with either.
Before the Supreme Court, it was urged by the Appellants that the first Proviso to Section 394(1) applied only to the amalgamation of a company which was being wound up, and not to cases where the prayer in the amalgamation petition was for “dissolution without winding up”. Further, the existence of an investigation report u/s 209A or the pendency of an investigation u/s 235 was not sufficient grounds for refusing to sanction a scheme which was approved by the general body. Contrary to this, the Respondents urged that Chapter V of Part VI of the Act was 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.” After discussing these contentions in light of earlier cases including Miheer Mafatlal, the Supreme Court observed:
“… 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… 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.”
Subsequently, the Supreme Court confirmed the finding that the OL’s report was vitiated. However, the Supreme Court then considered the issue of whether a lapse by the OL would be sufficient to refuse to sanction a scheme. This – the Court held – was a matter which was to be seen by the Company Judge. The Court refused to lay down an absolute rule that the vitiation of the OL’s report u/s 394(1) would result in vitiation of a scheme of amalgamation. It held, “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…”
On this basis, the Court allowed the appeal, and the order of the Single Judge sanctioning the scheme was restored.
One question which arises from this decision is – assuming that the OL had in fact properly applied his mind and had given an unfavourable report, would it still be open to the Court to reject that report by re-considering the relevant facts? There can certainly be instances where two reasonable persons (say, the OL and the Company Judge) can come to different views on the same set of facts. The decision of the Supreme Court suggests that it is open to the Company Judge to carry out a de novo review of the facts. Unless this were so, on what basis could the Court have sanctioned the scheme despite holding that the OL’s report was vitiated? And if the Company Judge can carry out a de novo review when the report is vitiated, why can he not carry out a de novo review in each case? What principle would bar the Judge from exercising such powers in all cases?
The second Proviso requires the existence of a report by the OL (“no order… shall be made… unless the Official Liquidator… made a report”) – in this case, admittedly, the report was vitiated. Certainly, the ‘report’ contemplated under the Proviso would not include a vitiated report. Thus, in the facts of the case, it must be held that there was no report at all. The decision of the Court appears to have the impact of treating the OL’s report as directory, and instead giving complete discretion in this regard to the Company Judge. Such a reading does not appear to fit in with the language of the second Proviso. With respect, perhaps the better course in such cases would be to require the OL to prepare a fresh report to rectify the infirmities in the original report.