Exedy Ceekay Limited vs Ceekay Daikin Limited

V.S. Aggarwal, J.—This is a petition filed u/s 394 of the Companies Act, 1956 (for short ''the Act'') for seeking approval of amalgamation between the petitioner, Exedy Ceekay Limited (transferor company) and Ceekay Daikin Limited (transferee company).

The relevant facts are that the petitioner company had filed company petition No. 221 of 1999 wherein a prayer was made for a direction for convening, holding and conducting meetings of the shareholders and creditors of the petitioner company, and for appointment of a Chairman and alternate Chairman for holding such a meeting. On 23 September, 1999, the said petition had been allowed and it was directed that a meeting of the shareholders and the creditors of the petitioner company should be held. Report of the meeting of the creditors and shareholders had been filed. It has been reported that they have no objection.

It has been pleaded that the Board of directors had already passed a resolution approving the scheme of amalgamation. The petitioner company had secured creditors to the tune of Rs. 29,26,000 and unsecured creditors to the tune of Rs. 6,64,06,813.11. The principal provisions of the scheme of amalgamation have been mentioned which are as under :

"With effect from 1 April, 1999 (hereinafter called ''the appointed day''), the entire undertaking of the petitioner company without any further act or deed, be and stand transferred to and vested in Ceekay Daikin Limited pursuant to section 394 of the Companies Act, 1956.

The scheme further provides that :

(i) One equity share of Rs. 10 fully paid up in Ceekay Daikin Limited or cash for odd shares shall be allotted to each of the subscribers for every 2.4 equity shares held by them in the petitioner company. However, no shares shall be allotted to Ceekay Daikin Limited for the shares held by it in the capital of the petitioner company. The new equity shares of Ceekay Daikin Limited issued in terms of the scheme shall, subject to applicable regulations, be listed and/or admitted to trading on the relevant stock exchangers where the equity shares of the petitioner company are listed and/or admitted to trading.

(ii) The equity shares of Ceekay Daikin Limited to be issued and allotted to the equity shareholders of the petitioner company shall rank pari passu in all respects with the equity shares of Ceekay Daikin Limited save that such shares shall be entitled to proportionate dividend from the appointed date. The holder''s of the shares of the petitioner company and Ceekay Daikin Limited shall, save as expressly provided otherwise in the scheme, continue to enjoy their existing rights under their respective articles of association including the right to receive dividends from the respective companies'' of which they are members till the appointed date.

The scheme further provides that :

(i) Ceekay Daikin Limited shall, on such transfer, take over all such employees, if any, of the petitioner company as are willing to join Ceekay Daikin Limited as far as possible, on the terms that are not less favourable than those as were enjoyed by such employees as on the appointed date during their employment by the petitioner company. The employees of the petitioner company shall be entitled only to those benefits and perquisites to which they were entitled as employees of the petitioner company even after the scheme becoming finally effective. Their services with the petitioner company, prior to such taking over, will not be treated as having been broken for the purposes of the provident fund, gratuity and other benefits, but will be reckoned for all such purposes from the date of their respective appointments with the petitioner company.

(ii) The directors of both the petitioner company and Ceekay Daikin Limited may assent on behalf of all persons concerned to any and all modifications or amendments of this scheme or of any conditions which the court and or any other authority under law may deem fit to approve of or impose and solve all difficulties that may arise for carrying out the scheme and do all acts, deeds and things necessary for putting the scheme into effect.

(iii) The scheme is conditional on and subject to :

(a) The sanction or approval of the authorities concerned being obtained and granted in respect of any of the matter in respect of which such sanction or approval be required.

(b) The approval of and agreement to the scheme by the requisite majorities of the shareholders of the petitioner company and Ceekay Daikin Limited (transferee company) respectively as may be directed by the Punjab & Haryana High Court at Chandigarh, and the Bombay High Court at Mumbai on the respective applications made for calling of meetings and necessary resolutions are passed under the Companies Act, 1956, for the purpose.

(c) The sanction of the respective High Courts at Chandigarh and Bombay under sections 391 and 394 of the Companies Act, 1956, on the application on behalf of the petitioner company and Ceekay Daikin Limited respectively being obtained.

(d) Completing of normalisation of share application money in the petitioner company by rejecting and refunding Rs. 5,87,50,000 to Exedy Corporation and its subsidiary companies, and Rs. 1,62,50,000 to Ceekay Daikin Limited.

(e) Injection of loan money amounting to Rs. 8,50,00,000 from Ceekay Daikin Limited to the petitioner company for proceeding with set up of production facilities without any interruption.

(f) Injection of external commercial borrowing of Rs. 38.25 million by Exedy Corporation, Japan, and Rs. 16.25 million by Ceekay Daikin P-1 Ltd. as loan money in the petitioner P-1 company. Hereto annexed and marked Annexure P-1 is a copy of the Scheme of Amalgamation."

Notice of the said petition had been issued to the Regional Director, Northern Region, Department of Company Affairs, Kanpur, who has pointed out that the affairs of the company do not appear to have been conducted in a manner prejudicial to the interest of its members or public interest. Subject to the decision of the Bombay High Court, it has no objection in this regard.

The official liquidator in a separate reply has pointed out that after the receipt of the notice from the court, notice was issued to the transferor company to make available certain information, and also to arrange for inspection of the books. The inspection of the record was conducted with the assistance of Shri J. P. Singh. The company is engaged in the business of manufacture, assemble, buy, sell or distribute certain articles mentioned therein. The company was stated to have incurred a loss of Rs. 18,16,719.54 for the year ending 31 March, 1999. The loss was stated to be because of it being a new company. It has no objection if the scheme as such is approved.

During the course of submissions, attention of the learned counsel was drawn towards the three clauses of the scheme which were stated to be conditional, and it recited that some of the conditions are completing of normalisation of share application money in the petitioner company by rejecting and refunding of Rs. 5,87,50,000 to Exedy Corporation and further injecting of loan money amounting to Rs. 8,50,00,000 from Ceekay Daikin Limited to the petitioner company. One of the further condition was injection of external commercial borrowing of Rs. 38.25 million by Exedy Corporation, Japan, and Rs. 16.25 million by Ceekay Daikin as loan money. Additional affidavit had been filed by GM (Finance) and Company Secretary of the transferor company. It recites that the company had refunded share application money to Exedy Corporation, and the company has already received Rs. 850 lakhs from Ceekay Daikin Limited as loan till 24 January, 2000. It also recited that the company has already received external commercial borrowing of Rs. 382.50 lakhs from Exedy Corporation, Japan, on 28 January, 2000.

It is not in controversy that the function of the court while exercising the powers under sections 391 and 394 of the Companies Act is basically supervisory. This court in the case of Patiala Starch and Chemical Works Limited (1958) 28 Comp Cas 111 (P&H), in this regard has held as under :-

"... It is true that the court ought not to substitute its direction for that of the shareholders, who should normally be permitted to manage their own affairs themselves, but it is also, be remembered, that in sanctioning a scheme, the court does not simply register the wishes of the shareholders of the creditors, as the case may be, as expressed. It is the duty or the court to examine the scheme and to see whether there has been compliance with the provisions of law. The scheme must conform to the standard of reasonableness, having regard to all the information that may be available ..."

Similarly, Gujarat High Court in the case of In Re: Sidhpur Mills Co. Ltd., , has held that it is the duty of the court to see that the scheme is a fair and reasonable one. The initial burden is on the petitioner to show that, Prima facie, the scheme is fair and reasonable which would be approved by a prudent shareholder. Madras High Court in the case of Coimbatore Cotton Mills Ltd. and Lakshmi Mills Co. Ltd. (1980) 50 Comp Cas 623 (Mad) also dealt with the same principle and concluded as under :

"(1) The court should be satisfied that the resolutions are passed by the statutory majority in value and in number in accordance with section 391(2) of the Companies Act at a meeting or meetings duly convened and held. This factor is jurisdictional in the matter of confirmation of the scheme. The court should not usurp the right of the members or creditors to decide whether they approved the scheme or not. Therefore, if a class whose interests are affected by a scheme does not assent to the scheme or approve it at a meeting convened in accordance with the provisions of section 391, the court will have no jurisdiction to confirm the scheme, even if it considers that the class concerned is being fairly dealt with or that it would approve the scheme.

(2) The court should satisfy itself that those who took part in the meeting are fairly representative of the class and that the statutory meeting did not coerce the minority in order to promote the adverse interest of those of the class whom they support to represent.

(3) Lastly, in exercising its discretion under sections 391 and 394, the court is not merely acting as a rubber stamp. It is the function of the court to see that the scheme as a whole, having regard to the general conditions and background and object to the scheme, is a reasonable one; and, if the court so finds, it is not for the court to interfere with the collective wisdom of the shareholders of the company. When once the court finds that the scheme is a fair one, then it is for the objector to convincingly show that the scheme is unfair and that, therefore, the court should exercise the discretion to reject the scheme, notwithstanding the views of a very large majority of the shareholders that the scheme is a fair one. If the court is of the opinion that there is such an objection to it as any reasonable man would say that he would not approve of it, then the court may refuse to confirm the scheme. However, if the scheme as a whole is fair and reasonable, it is the duty of the court not to launch on an investigation upon the commercial merits or demerits of the scheme which is the function of those who are interested in the arrangement.

(4) There should not be any lack of good faith on the part of the majority."

Delhi High Court in the case of Shyam S. Rastogi v. Nona Sona Exports (P) Ltd. (1984) 3 Comp LJ 37 (Del) : (1986) 50 Comp Cas 832 (sic), also deprecated the practice that the court is merely a rubber stamp. It was held as under :

"Company Court is not a mere conduit pipe or stamping authority to whatever scheme that may be laid before it. Not unoften, motivations in the moving of such schemes are oblique. It is, in fact, for the court to first look at the scheme whether it has any strength or merit of its own and is financially viable or a mere attempt to take back the affairs and the assets of the company which had been earlier perforce taken over at the time of winding up."

Same test was applied by the Rajasthan High Court in the case of Miss Richa Jain Vs. Registrar of Companies and Others, . Bombay High Court in the case of In Re. Tata Oil Mills Co. Ltd. and In Re. Hindustan Lever Ltd., held that the role which the courts have to play in this country is more vital and potent. It has no supervisory role [It has not only a supervisory role ?] but also a pragmatic role which requires the forming of an independent and informal judgment.

Supreme Court in the case of Hindustan Lever Employees'' Union Vs. Hindustan Lever Limited and others, in (para 77 at page 294 of Comp LJ) of the judgment, held as under :-

"Nor do we think that ''public interest'' which is to be taken into account as an element against approval of amalgamation would include a mere future possibility of merger resulting in a situation where the interests of the consumers might be adversely affected. If, however, in future, the working of the company turns out to be against the interest of the consumers or the employees, suitable corrective steps may be taken by appropriate authorities in accordance with law. As has been said in the case of Fertilizer Corporation Kamgar Union (Regd.), Sindri and Others Vs. Union of India (UOI) and Others, , at page 356, para 470 :

''It is not a part of judicial process to examine entrepreneurial activities to ferret out flaws. The court is least equipped for such oversights. Nor, indeed, it is the function of the judges in our constitutional scheme.''

Now, merely because the scheme envisages allotment of 51% equity shares to Unilever, the scheme cannot be held to be against public interest."

More recently, Supreme Court in the case of Miheer H. Mafatlal Vs. Mafatlal Industries Ltd., , had provided certain guidelines which are as under (para 29 at pages 144-145 of Comp LJ) :

"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.

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).

That the concerned meetings of the creditors or members or any class of them had the relevant material to enable the voters to arrive at the 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.

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

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

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.

That the Company Court has also to satisfy itself that members or class of members of creditors or class of creditors, as the case may be, were acting bona fide and in good faith and were not coercing the minority in order to promote any interest adverse to that of the latter comprising of the same class whom they purported to represent.

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.

Once the aforesaid broad parameters about the requirement 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."

It is obvious from the aforesaid that the consistent view is that the court is basically having supervisory jurisdiction, but it is not a rubber stamp. The claim has to be seen as a whole. If it is found that it is not fair or what is being projected is not true, the court can well refuse the claim. Basically, it is the creditors'' as well as the shareholders ''and others'' wishes which matter, but totality of the facts and the circumstances have to be kept in mind before giving approval to such a scheme.

The relevant portion of the conditions before the scheme have been referred to above. If the two companies are being amalgamated, the idea of getting a loan of Rs. 8,50,00,000 has not been explained. The said loan is stated to have already been paid. Similarly, there has been injection of external commercial borrowing of Rs. 382.50 lakhs from Exedy Corporation, Japan. There was no such point of commercial borrowing by the petitioner. If the same is being amalgamated with the other company, the only purpose that one could conclude is that it would be defeating certain provisions of law which otherwise may be passing of the property to the transferee company. These conditions certainly look unfair and in fact, without the permission of the court have already been given effect to as have been indicated in the affidavit. These conditions clearly reveal that what is being projected is not correct. Therefore, the permission as such cannot be granted.

For these reasons, the company petition being without merit, must fail and is accordingly dismissed.