SUPREME COURT OF INDIA
Chembra Orchard Produce Ltd.
v/s
Regional Director of Company Affairs
CIVIL APPEAL NOS. 7115-7120 OF 2008
December 4, 2008
RELEVANT EXTRACTS:
By impugned judgment dated August 20, 2007, the Division Bench of the Karnataka High Court on reference answered the above question of law stating that hearing of all parties was necessary before the Company Court could issue directions to convene a meeting under Section 391(1) of the Companies Act and that an ex-parte order in that connection could not be passed. It is this order which is under challenge.
At the outset, it may be stated that the Companies (Court) Rules, 1959 are enacted in exercise of the powers conferred by Section 643(1)(2) of the Companies Act, 1956. They have force of an Act passed by the Parliament. The said Rules 1959 have statutory force of law. The said Rule 67 in unequivocal terms states that an application under Section 391(1) for an order for convening a meeting of creditors and/or members or any class of them shall be by a Judge's Summons supported by an affidavit. Rule 67 further requires the proposed compromise or arrangement to be annexed to the affidavit as an exhibit. Rule 67 is, however, subject to Rule 68 (which deals with a case where the Company is not the applicant). If one reads Rule 67 with Form 33 and Form 34, one find that essentially the Court while issuing such summons is required to apply its mind to checklist indicated in Rule 69 and it needs to be prima facie satisfied about the genuineness and bonafides of the application. One aspect needs to be highlighted. Hearing of the Motion cx-parte does not mean that the Court had not to apply its mind or that the Court is not required prima facie to be satisfied about the genuineness or bonafides. However, it is a preliminary step. One more aspect needs to be mentioned. If hearing is required to be given to contributors, creditors and share-holders, then the entire scheme of Section 391 (which is a Code by itself) would become unworkable. Further, when Rule 67 categorically states that Summons for Directions shall be moved ex-parte, the question of prejudice or rule of natural justice does not come into play. However, there is a rationale for slating that the Summons shall be moved ex-parte and that rationale is that it is an Application for an Order for Meeting as a preliminary step at the threshold stage and at that stage it is not necessary for the Company to give notice of hearing to the creditors, members and share-holders (see: Palmer's Company Law). Further, if one examines Rule 67 in the context of Rule 73, one finds that after Summons for Direction are issued as and when the meeting is ordered to be convened, the notice of the meeting is required to be given to the creditors and/or members or such other classes enumerated in Rule 73. Similarly, under Rule 74 advertisement of the notice of meeting is also required to be published in such newspapers and in such manner as the Judge may direct. This is to be supported by affidavit of service under Rule 76.
The analysis of the above Rules indicates that there is a clear dichotomy between the threshold stage of issuance of directions to convene a meeting and the subsequent stage of a notice of meeting which is contemplated by Rule 73 and for that precise reason Rule 67 states that the summons shall be moved ex-parte.
Our view is supported by various judgments of this Court and the High Courts. As far as the scheme of Sections 391 -to 394 of the Companies Act is concerned, we quote hereinbelow Paragraph 28 of the judgment of this Court in the case of Miheer H. Mafatlal v. Mafatlal Industries Ltd. reported in 1997 (1) SCC 579:
"28. The relevant provisions of the Companies Act, 1956 are found in Chapter V of Part VI dealing with "Arbitration, Compromises, Arrangements and Reconstructions". In the present proceedings we will be concerned with Sections 391 and 393 of the Act. The relevant provisions thereof read as under:
"391. (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 relation to the company under Sections 235 to 251, and the like.
393. (1) Where a meeting of creditors or any class of creditors, or of members or any class of members, is called under Section 391,—
(a) with every notice calling the meeting which is sent to a creditor or member, there shall be sent also a statement setting forth the terms of the compromise or arrangement and explaining its effect, and in particular, stating any material interests of the directors, managing directors, managing agents, secretaries and treasurers or manager of the company, whether in their capacity 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 insofar as, it is different from the effect on the like interests of other persons; and
(b) in 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.
The aforesaid provisions of the Act show that compromise or arrangement can be proposed between a company and its creditors or any class of them or between a company and its members or any class of them. Such a compromise would also take in its sweep any scheme of amalgamation/merger of one company with another. When such a scheme is put forward by a company for the sanction of the Court in the first instance the Court has to direct holding of meetings of creditors or class of creditors or members or class of members who are concerned with such a scheme and once the majority in number representing three-fourths in value of creditors or class of creditors or members or class of members, as the case may be, present or voting either in person or by proxy at such a meeting accord their approval to any compromise or arrangement thus put to vote, and once such compromise is sanctioned by the Court, it would be binding to all creditors or class of creditors or members or class of members, as the case may be, which would also necessarily mean that even to dissenting creditors or class of creditors or dissenting members or class of members such sanctioned scheme would remain binding. Before sanctioning such a scheme even though approved by a majority of the concerned creditors or members 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 sub-section (2) of that section. So far as the meetings of the creditors or members, or their respective classes for whom the Scheme is proposed are concerned, it is enjoined by Section 391(l)(a) that the requisite information as contemplated by the said provision is also required to be placed for consideration of the voters concerned so that the parties concerned before whom the scheme is placed for voting can take an informed and objective decision whether to vote for the scheme or against it. On a conjoint reading of the relevant provisions of Sections 391 and 393 it becomes at once clear that the Company Court which is called upon to sanction such a scheme has not merely to go by the ipse dixit of the majority of the shareholders or creditors or their respective classes who might have voted in favour of the scheme by requisite majority but the Court has to consider the pros and cons of the scheme with a view to finding out whether the scheme is fair, just and reasonable and is not contrary to any provisions of law and it does not violate any public policy. This is implicit in the very concept of compromise or arrangement which is required to receive the imprimatur of a court of law. No court of law would ever countenance any scheme of compromise or arrangement arrived at between the parties and which might be supported by the requisite majority if the Court finds that it is an unconscionable or an illegal scheme or is otherwise unfair or unjust to the class of shareholders or creditors for whom it is meant. Consequently it cannot be said that a Company Court before whom an application is moved for sanctioning such a scheme which might have got the requisite majority support of the creditors or members or any class of them for whom the scheme is mooted by the company concerned, has to act merely as a rubber stamp and must almost automatically put its seal of approval on such a scheme. It is trite to say that once the scheme gets sanctioned by the Court it would bind even the dissenting minority shareholders or creditors. Therefore, the fairness of the scheme qua them also has to be kept in view by the Company Court while putting its seal of approval on the scheme concerned placed for its sanction. It is, of course, true that so far as the Company Court is concerned as per the statutory provisions of Sections 391 and 393 of the Act the question of voidability of the scheme will have to be judged subject to the rider that a scheme sanctioned by majority will remain binding to a dissenting minority of creditors or members, as the case may be, even though they have not consented to such a scheme and to that extent absence of their consent will have no effect on the scheme. It can be postulated that even in case of such a scheme of compromise and arrangement put up for sanction of a Company Court it will have to be seen whether the proposed scheme is lawful and just and fair to the whole class of creditors or members including the dissenting minority to whom it is offered for approval and which has been approved by such class of persons with requisite majority vote."
In the case of Sakamari Steel & Alloys Ltd. reported in 51 Company Cases page 266, the learned Single Judge of the Bombay High Court held that Section 391(1) is not a sign-post but a check-post whereat it is a duty of the Court to examine the genuineness and the bonafides of the Scheme for itself.
A reading of the above judgment would, therefore, show that at the stage of issuance of Summons for Directions to convene a meeting, though the Company Judge has to apply its mind, prima facie, on the genuineness of the Scheme, basically the entire exercise is to verify whether the numerous conditions prescribed in Rule 69 are satisfied read with Form 33 and Form 34.
In the impugned judgment, reliance is placed on the earlier judgment of the Allahabad High Court in the case of Hind Auto Indo Ltd. v. M/s Premier Motors (P) Ltd. reported in AIR 1970 Allahabad 165. From a bare reading of that judgment we find that the said case related to interpretation of Section 394A of the Companies Act with which we are not concerned in this case. Be that as it may, there are observations in the said judgment, with respect, with which we do not agree, both on the interpretation of Rule 67 and 69 on one hand as also on the basis of the practical effect of the interpretation given by the High Court in the present case. If at the threshold stage of directions to convene a meeting hearing is required to be given to the members as held in the impugned judgment the scheme of the Companies (Court) Rules 1959 will become unworkable. For the above reasons, with respect, we disagree with the view expressed by the Allahabad High Court in the case of Hind Auto Tndo Ltd. (supra) and we agree with the judgment of the Bombay High Court in the case of Sakamari Steel & Alloys Ltd. (supra).
