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June 2011

Scheme of Amalgamation — Sanction of Court — Companies Act, section 391(2), 394.

By Dr. K. Shivaram
Ajay R. Singh
Reading Time 5 mins
[Sesa Industries Ltd. v. Krishna H. Bajaj & Ors., AIR 2011 SC 1070]

A resolution was passed by the Board of Directors of SIL to amalgamate SIL with SGL, effective from 1st April, 2005. In pursuance thereof, SIL and SGL filed respective company applications in the Bombay High Court seeking the Court’s permission to convene a general body meeting. In the year 2006 the High Court allowed SIL and SGL to convene meetings for seeking approval of shareholders. The shareholders of SIL & SGL by 99% majority approved the scheme of amalgamation. Only the respondent No. 1 was the sole shareholder who had objected. Petitions were filed in the High Court for according approval to the scheme. Official Liquidator also filed his report. The objection of report were dismissed and subsequent appeals against the same were dismissed. Thereafter the Company Judge sanctioned the scheme of amalgamation. Aggrieved by the above order the Respondent No. 1 filed an appeal whereby the Division Bench set aside the Company Judge order. Hence the appeals were filed by SLP before the Apex Court.

The Court observed 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 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 subsection (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.

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.

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

In the instant case concurrent finding of fact was recorded that information supplied was sufficient. However, the official liquidator failed to incorporate contents of inspection report u/s.209A in his affidavit. The official liquidator thereby failed to discharge the statutory burden placed on him under the second proviso to section 394(1) of the Act.

However the sanction of scheme cannot be held up merely because the conduct of official liquidator is blameworthy. In the instant case the findings in the report u/s.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 instant 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. The Company Judge, having examined all material facts, was justified in sanctioning the scheme of amalgamation.

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