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IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
COMPANY PETITION NO.382 OF 2008
CONNECTED WITH
COMPANY APPLICATION NO.253 OF 2008
In the matter of the Companies Act 1 of
1956;
And
In the matter of Sections 391 to 394 of the Companies Act, 1956;
And
In the matter of scheme of amalgamation o Niulab Equipment Company Pvt. Ltd. With
Ashco Industries Ltd.
Niulab Equipment Co. Pvt. Ltd. ..Petitioner Company.
WITH
COMPANY PETITION NO.383 OF 2008
CONNECTED WITH
COMPANY APPLICATION NO.254 OF 2008
In the matter of the Companies Act 1 of
1956;
And
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In the matter of Sections 391 to 394 of the Companies Act, 1956;
And
In the matter of scheme of amalgamation
of Niulab Equipment Company Pvt. Ltd.
With Ashco Industries Ltd.
Ashco Industries Ltd. ..Petitioner Company.
Mr.Shyam Mehta with Mr. Rajesh Shah i/b. M/s.Rajesh Shah & Co. or the Petitioners.
Mr.C. J. Joy with Ms. Bharati Mahant i/b. M/s. S.K. Mohapatra for Regional Director.
CORAM : S.J. VAZIFDAR, J.
DATE : 24TH MARCH, 2009.
ORAL JUDGMENT :-
1. The Petitioners seek the sanction of this Court to a scheme
of amalgamation. The Petitioner in Company Petition No.382 of
2008, Niulab Equipment Company Pvt. Ltd., is the transferor
company and the Petitioner in Company Petition No.383 of 2008,
Ashok Industries Ltd., is the transferee company.
2. The provisions of the scheme as such have not been
challenged or even questioned. It is not necessary therefore to deal
with it in any detail. Suffice it to state, that under the scheme, the 3
entire undertaking of the transferor company is to stand transferred to
and vested in the transferee company as a going concern, subject to
the same being sanctioned by this Court. Under the scheme, two
equity shares of Rs.10/- each credited as fully paid up capital of the
transferee company are to be issued and allotted to all the equity
shareholders of the transferor company for every one equity share of
the face value of Rs.1/- each, held by them of the transferor company.
3. The Petitioners are under the same management. This
was so stated in the Company Application as well as in the Company
Petition.
4. Company Application No.253 of 2008 was taken out by the
transferor company and Company Application No.254 of 2008 was
filed by the transferee company. The Company Applications were
disposed of by orders dated 22.2.2008.
5(A). In Company Application No.253 of 2008 the learned Judge
dispensed with the convening and holding of the meeting of the equity
shareholders of the transferor company in view of the consent given
by all equity shareholders agreeing to the scheme of amalgamation.
By the said order, the convening and holding of the meeting of the 4
only secured creditor of the transferor company was also dispensed
with in view of the averment in paragraph 15 of the Company
Application, that there was only one secured creditor viz. Punjab
National Bank of the value of Rs.4,43,92,831/- who would not in any
way be affected by the scheme as the assets of the transferor
company after the proposed amalgamation would be far more than its
liabilities and, as such, sufficient to discharge the liabilities and the
undertaking to give notice of the date of hearing of the petition by
RPAD to the Punjab National Bank. The transferor company was
however directed to convene a meeting of the unsecured creditors for
the purpose of considering and, if thought it, approving, with or
without modification, the scheme of amalgamation.
The order directed one Ashok Kotwani, director of the
transferor company and, failing him, Mrs. Kanchan A. Kotwani, also a
director of the company, to be the Chairman of the said meeting, who,
in turn, was directed to report the result thereof within 30 days of the
meeting.
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(B). There is no dispute that the procedure as well as the above
order were duly complied with. The unsecured creditors unanimously
approved the scheme.
(C). By an order dated 25.4.2008 the above petition was
admitted, fixed for hearing on 27.6.2008 and the usual directions
regarding the public notices and notice to the Regional director, the
Official Liquidator and the secured creditor were given. The petition
now comes up for final hearing.
6(A). In Company Application No.254 of 2008, the order dated
22.2.2008 directed the transferee company to convene a meeting of
the equity shareholders and the unsecured creditors for the purpose
of considering and, if thought fit, approving with or without
modification, the scheme of amalgamation. The order appointed the
said Ashok Kotwani and failing him, the said Mrs. Kanchan A.
Kotwani, to be the Chairman of the meeting.
The meeting of the secured creditors however was
dispensed with in view of what was stated in paragraph 15 of the
Company Application viz. that there were four secured creditors of the
value of Rs.1,53,647,678/- who would not be affected by the 6
proposed scheme of amalgamation, and the undertaking of the
transferee company to give individual notices of the date of hearing of
the petition through RPAD to all the secured creditors.
(B). There is no dispute that the procedure as well as the above
orders were duly complied with. The equity shareholders and the
unsecured creditors approved the scheme.
(C). By an order dated 25.4.2008 in the above petition,
directions were passed in similar terms as those in respect of the
transferor company. This petition therefore comes up for final
hearing.
7. The Official Liquidator has filed an affidavit in Company
Petition No. 382 of 2008 stating that the affairs of the transferor
company had been conducted in a proper manner and that the
transferor company may be ordered to be dissolved by this Court.
The Official Liquidator has not opposed the scheme being sanctioned.
8. As noted above, the entire procedure has been followed.
Notices have been give to all the concerned parties. There has been
no objection raised by any shareholder or creditor or any other person
to the scheme being sanctioned.
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9. The Regional director however has filed a common affidavit
in the above Company Petitions stating that subject to what is stated
in paragraphs (viii) and (ix), the scheme appears to be in order.
Paragraphs (viii) and (ix) of the affidavit read as under :-
"(viii) That affidavits vide dated 16/12/2008, Mr. Ashok Kotwani Managing Director of the Transferee Company admitted that the
company and its directors, having regard to the legal opinion and certificates of Company Secretaries, have violated provisions of section 297 of the Companies Act 1956
during the last 3 years. Copy of the said affidavits enclosed herewith and marked as Exhibit `E-1' & `E-2'. The Transferee Company had also moved an application for compounding of the said offence.
(ix) Deponent further submits that, a further affidavit dated 16/12/2008 was filed by the said Mr. Ashok Kotwani Managing Director of the Transferee Company, also admitting
violation of section 295 of the Companies Act 1956 in respect of the issue of a Corporate Guarantee of Rs. 765 lacs by the company, on behalf of the Transferor Company (which is a private limited company of the promoters of the Transferee Company) to the Punjab
National Bank for the credit facilities extended to the Transferor Company without previous approval of the Central Government. Further it has not charged any commission/ quid pro quo for extending the Corporate guarantee, which action was deemed prejudicial to the Transferee Company by the Statutory
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Auditors in their Report vide Annexure to the Auditors Report dated 30/06/2007. That it may be noted that consequent to the said violation, the office of director held by the Managing Director and other directors fell vacant as the provisions of section 283(1)(h) of the Act stood attracted. In view of the above, the Registrar of Companies is being directed to take necessary penal action for the default under section 295, 297nd section 283 (1)(h) of the Act by the Transferee Company. As the Transferee Company is a listed public limited company, the above facts, being
material having a bearing on the affairs of the company in the context of `Corporate
Governance', are brought to the notice of this Hon'ble High Court. The letter dated 11/10/2008 and 17/12/2008 of M/s Ashco
Industries Limited are annexed hereto and marked as Exhibit `F-1' & `F-2'."
10. The Punjab National Bank had granted a loan of Rs.765
crores to the transferor company which was secured inter-alia by a
guarantee issued by the transferee company. It was contended that
the said Ashok Kotwani and Mrs. Kotwani being directors of both the
transferor and the transferee companies, the guarantee was issued
contrary to and in violation of Section 295.
11. Section 295 reads as under :-
"295. Loan to directors etc.--(1) Save as otherwise provided in sub-section (2), no company (hereinafter in this section referred 9
to as "the lending company") [without
obtaining the previous approval of the Central Government in that behalf shall, directly or indirectly,] make any loan to, or give any guarantee or provide any security in
connection with a loan made by any other person to, or to any other person by,--
(a) any director of the lending
company or of a company which is its holding company or any partner or relative of any such director;
(b) any firm in which any such
director or relative is a partner;
(c ) any private company of which
any such director is a director, or member; (d) any body corporate at a general
meeting of which not less than twenty-five per cent of the total voting power may be
exercised or controlled by any such director, or by two or more such directors together; or (e) any body Corporate, the Board
of directors, managing director, [* * *] or manager whereof is accustomed to act in
accordance with the directions or instructions of the Board, or of any director or directors, of the lending company.
[(2) Sub-section (1) shall not apply to-- (a) any loan made, guarantee given
or security provided--
(i) by a private company unless it is
a subsidiary of public company, or
(ii) by a banking company;
[(b) any loan made by a holding company to its subsidiary company;]
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[(c) any guarantee given or security
provided by a holding company in respect of any loan made to its subsidiary company.]
12. The guarantee issued by the transferee company in favour
of the Punjab National Bank is therefore contrary to Section 295(1)(c).
13. Mr. Joy submitted that in view of the violation under Section
295, the said Ashok Kotwani and Mrs. Kotwani had by virtue of the
provisions of Section 283(1)(h) vacated office as directors. He
submitted that the resolution of the Board of Directors of the
transferee company proposing the scheme is therefore void having
been passed at a meeting without the requisite quorum. Accordingly,
he submitted, all subsequent steps leading to this petition are void.
He further submitted that though a violation under Section
295 would not by itself be a ground for rejecting the scheme, it ought
to be brought to the notice of the shareholders and creditors. In other
words, Mr. Joy, relying upon Section 391(2), submitted that the
moment there is a violation under Section 295 the same must be
brought to the notice of the shareholders and creditors and that if the
same is not done, the matter must be again placed before the
shareholders and the creditors disclosing the same to seek their 11
approval afresh.
14. Sections 391(1) and 393(1)(a) read as under : -
"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 [Tribunal] 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 [Tribunal] 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 [Tribunal], 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:
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[Provided that no order sanctioning any
compromise or arrangement shall be made
by the [Tribunal] unless the [Tribunal] is satisfied that the company or any other
person by whom an application has been
made under sub-section (1) has disclosed to the [Tribunal], 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. Information as to compromises or arrangements with creditors and members. --(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 director, [* * *] 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 in so far as, it is different from the effect on the like interests of other persons; and
(b) ......................................................."
15. The mere fact of a violation of the provisions of Sections 13
235 to 351 by itself does not invalidate or warrant the Court refusing
to sanction a scheme of arrangement under Sections 391 to 394,
including a scheme of amalgamation. It is not every violation of these
sections that disentitles a scheme being proposed or sanctioned. It is
only those violations which adversely reflect upon or affect the
scheme that would persuade the Court not to sanction the scheme.
That Section 391(2) only requires the disclosure of all material facts to
the Court, establishes this. If it were otherwise, Section 391, and in
particular, sub-section (2) thereof, would have been worded
differently. The purport of Section 391(2) is that all the material facts
relating to the company including the pendency of any investigation
proceedings in relation to the company under Sections 235 to 351
and the like, ought to be disclosed to the Court in order to enable the
Court to decide whether or not the scheme ought to be sanctioned in
view of such facts. The manner of exercise of discretion would then
depend upon the facts of each case.
16. This is fortified by the fact that it is not necessary that a
scheme under Sections 391 and 394 is proposed only by the
company or its directors or promoters. It may be proposed by others 14
also, such as the members or creditors of the company. Indeed, a
scheme could also be proposed by the Official Liquidator of a
company. If, for instance, there is a violation of the provisions of
Sections 235 to 351 or any one or more of them by a given director,
the same would not bar the company or any member or creditor of the
company from proposing a scheme under Sections 391 and 394.
Even if, for instance, a company is adversely affected due to any acts
on the part of its directors, it would not be unusual for an arrangement
to be arrived at between the company and its creditors.
17. In a given case the Court may well order any additional
facts not earlier noticed, to be placed before the members and/or the
creditors of the company to enable them to reconsider their decision
to support the scheme. This would depend upon the answer to two
questions. Is the fact a material one, to wit, is it relevant or material to
the scheme that is proposed. If the answer is in the affirmative, the
next question is whether there was an adequate disclosure of the
facts to the members, shareholders and other concerned persons. If
the answer to either of the questions is in the negative there does not
arise the necessity of placing the material before the concerned 15
persons.
18. In the present case, the fact of the guarantee issued by the
transferee company to the Punjab National Bank in respect of the
loans advanced by the bank to the transferor company and the details
of the Board of Directors of both the companies would constitute
material facts qua both the companies.
19. The question then is whether there was an adequate
disclosure of the facts to the concerned persons. I am of the opinion
that there was.
20. Firstly, I do not find the guarantee having been given by the
transferee company in respect of the facilities granted by the Punjab
National Bank to the transferor company, by itself, to warrant a refusal
to the scheme being sanctioned. Mr.Joy has not indicated that the
same adversely reflects upon the scheme or that it would adversely
affect the members or the creditors or the companies if the scheme is
sanctioned. It is not contended that the directors of the two
companies had any interest in the scheme except as shareholders in
general. The violation of Section 295 does not indicate the same.
There is nothing on record which suggests the same either. 16
21. There admittedly is no investigation proceeding pending in
relation to the Petitioners, under Sections 235 to 351 including under
Section 295 and 297 and the question therefore of disclosing the
same does not arise.
22. I am satisfied that there was sufficient material before the
members and the shareholders in regard to the guarantee issued by
the transferee company to the Punjab National Bank and the details
of the directors of the companies to have enabled them to take an
informed decision as to whether the scheme ought or ought not to
have been sanctioned.
(A). The Petitioners in both the Company Applications and both
the Company Petitions expressly stated that they were under the
same management.
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(B). The Annual Report of the transferee company for the
financial year 2006-07 also contains an important disclosure.
Schedule "S" containing the notes to the consolidated accounts refers
to the outstanding bank guarantees under the caption "contingent
liabilities". The guarantee by the transferee company on behalf of the
transferor company to the Punjab National Bank for the credit limit of
Rs.765 crores is specifically referred to therein.
Schedule "S" also contains details of "related party
disclosures" as under :-
"7) RELATED PARTY DISCLOSURES :
i) SUBSIDIARY :-
Aschco Niulab Exports Limited
ii) ASSOCIATE COMPANIES :-
Niulab Equipment Company Private Limited
ANKK Media Arts Private Limited
iii) KEY MANAGEMENT PERSONNEL AND
RELATIVES:-
Mr.Ashok K. Kotwani
Mrs.Kanchan A. Kotwani
Mr.Bhagwan K. Kotwani
Mr. Manohar K. Kotwani
Mr. Ankuish A. Kotwani
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Ms. Neha A. Kotwani
M/s. Sayuj Telcom
M/s. Dolly Designs
Mrs.Kavita Godhwani (emphasis supplied)
(C). The annexure to the Auditor's Report for the year ended
31.3.2007 discloses the opinion of the auditors that the terms and
conditions on which the guarantees given by the transferee company
for the loan taken by others from the bank are, prima-facie, prejudicial
to the company. This was a part of the 21st Annual Report for the
year 2006-2007 which was circulated to all the shareholders. The
shareholders therefore had the necessary material before them
regarding the guarantee.
(D). The Annual Report for the financial year 2006-07 of the
transferor company in Schedule "C", which forms part of the balance-
sheet with details of secured loans, refers to the guarantee furnished
by the transferee company in respect of the facilities granted by the
Punjab National Bank.
(E). The notice of the meeting convened by the Court by the
aforesaid order dated 22.2.2008 in the petition filed by the transferee
company, to the shareholders and the unsecured creditors discloses
the names of the said Ashok Kotwani and Mrs. Kanchan Kotwani as 19
directors of the transferee company as well as the transferor company
and also furnishes details of their shareholdings in both the
companies. The said notices state that the directors of the transferee
company as well as of the transferor company have no interest in the
scheme except as shareholders in general.
23. In the circumstances, I see no reason to compel the facts
regarding the violation under Section 295 to be placed before the
members or the creditors again.
24(A). Mr. Joy relied upon the judgment of a learned Single Judge
of the Kerala High Court in St. Mary's
Finance Ltd. v. R. G. Jayaprakash
& Ors., (2000) 99 Company Cases, 359. The judgment is of no
relevance to the present case. In that case, the learned Judge found
that the scheme itself was fraudulent, unfair and with a view to benefit
another company St. Mary's Properties Ltd., to which it had advanced
a sum of about Rs. 7.68 crores. The scheme there proposed a
compromise between the company and its creditors whereby the
amount proposed to be paid to the creditors in installments were far
lower than what they were entitled to. Several creditors opposed the
scheme. It was found that the relevant fact about the indebtness of 20
the other company had not been brought to the notice of the creditors.
It was also held that a director of the company had virtually forced the
creditors to issue proxies enabling him to vote in favour of the
scheme on the basis of a letter circulated to the creditors, the
contents whereof were found to be unfair. The advances to the other
company were in fact illegal as the company was admittedly a nidhi
company. In the passage at page 370 of the report, relied upon by
Mr.Joy, it is in fact expressly held that because of the compromise
there, the real beneficiary was St. Mary's Properties Ltd., to whom the
company had heavily advanced and that the company had withheld
that valid information from the creditors. In the circumstances, it was
held that the meeting, at which the company managed to obtain
through "compelled proxies" had no validity in the eye of law.
The learned Judge referred to the observations of the
judgment of the Gujarat High Court in the case of Sidhpur Mills Co.
Ltd. In re, AIR 1962 Gujarat, 305 where it was observed that if the
director possesses any interest of whatever kind in the scheme, then
that interest must be stated in the statement accompanying the
scheme. In that case, it was found that the directors in fact 21
possessed an interest in the scheme other than merely as
shareholders of the company and that the same had not been
disclosed.
(B). In the present case, as mentioned earlier, there is nothing
to indicate that the directors possessed any interest of any kind in the
scheme other than as shareholders of the two companies. Further,
the fact of the guarantees and the extent of the liabilities have been
disclosed to the shareholders and the members as well as to the
Official Liquidator, the Regional director and the Court, which was not
the case before the Kerala High Court.
25. Mr. Joy then relied upon the judgment of a learned Single
Judge of this Court in KEC International v. Kamani Employees Union,
(2002) 109 Company Cases, 659. He relied upon page 681 of the
report which, in turn cited with approval the passage from the
judgment of the Gujarat High Court in Sidhpur Mills Co. Ltd. In re,
which was also referred to by the learned Judge of the Kerala High
Court.
It is important to note the last sentence in this passage,
which reads thus :-
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"In other words, if the director possesses any interest of whatever kind in the scheme, then, that interest must be stated in the statement accompanying the scheme." (emphasis
supplied)
I have already held that there is nothing to indicate that the
directors possess any interest "in the scheme" except as
shareholders of the Petitioners in general.
26(A). Mr. Joy further relied upon a judgment of a learned Single
Judge of this Court in Bharat Synthetics Ltd. v. Bank of India & Anr.,
(1995) 82 Company Cases, 437. The judgment is of no relevance. In
that case, the banks who were secured creditors, contended that if
the merger was allowed, their claims would be jeopardised. The
learned Judge accepted this contention. The Petitioners there had
not even placed before the Court the latest financial position.
(B). In the present case there is no opposition to the scheme
from anyone. I have already held that the guarantee per-se does not
persuade me to refuse sanctioning the scheme.
27. Mr. Mehta's reliance upon the following judgments on the
question of the nature of disclosure is well founded. They indicate the
adequacy of the disclosure in this case. 23
28. In Hindustan Lever Employees'
Union v. Hindustan Lever Ltd.
& Ors., 1994(4) Bom. C.R., 465, the Division Bench affirmed the
judgment of the learned Single Judge including the observations that
the disclosure under Section 393(1)(a) is not the same as the
disclosure to be made under Section 173. Under Section 173, all
material facts mentioned therein must be stated. However, under
Section 393(1)(a) the statement must clearly state the compromise
and arrangement, its effect and the manner in which the material
interest of specified categories of persons in any capacity, are likely
to be affected by the scheme in case the effect is different from the
effect on the like interest of non-specified categories of persons. The
Division Bench further held that the purpose of such disclosure is to
enable the shareholders to make their objections and that every non-
disclosure is not fatal unless it is fraudulent and has prejudicially
affect the decision-making process of the members.
In the present case, there is nothing that suggests any
fraud. Nor is there anything that suggests that the disclosure already
made did not enable the creditors and the members to make a
informed decision.
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29. The above judgment was affirmed by the Supreme Court in
Hindustan Lever Employees'
Union v. Hindustan Lever Ltd. & Ors.,
1995Supp (1) Supreme Court Cases, 499. In paragraph 58, the Supreme
Court held as under :-
"58. In the facts of this case, considering the overwhelming manner in which the shareholders, the creditors, the debenture- holders, the financial institutions, who had 41% shares in TOMCO, have supported the
Scheme and have not complained about any lack of notice or lack of understanding of what the Scheme was about, we are of the view, it will not be right to hold that the explanatory statement was not proper or was lacking in material particulars."
30. I am satisfied that the disclosures made in the present case
enabled the members and the creditors to make a informed decision
which they did while supporting the scheme. There has been no
opposition to the scheme being sanctioned by anyone. Indeed, even
the Regional director does not oppose the scheme as such.
I do not find the violation under Section 295 to have any
bearing on the scheme such that I ought to overrule the decision of all
those who desire it to be implemented including the members and
creditors of both the companies. It is not even contended before me 25
that the scheme itself is only to benefit the concerned directors or any
other particular person or persons.
31. Mr. Joy merely submits that the meetings must be
convened once again, specifically stating that there is a violation
under Section 295.
32. I do not agree. The members and the creditors already had
the relevant information including about the facts of the guarantee
and the names of the directors of both the companies.
33. This brings me to Mr. Joy's submission that in view of the
violation of Section 295 the concerned directors viz. Mr. And Mrs.
Kotwani had vacated office as directors by virtue of the provisions of
Section 283(1)(h), which reads as under :-
"283. Vacation of office by directors.--(1) [The office of a director shall become vacant if]--
(h) [he (whether by himself or by
any person for his benefit or on his account), or any firm in which] he is a partner or any private company of which he is a director, accepts a loan, or any guarantee or security for a loan, from the company in contravention of Section 295;"
Mr. Joy submitted that in that event there was no quorum at
the meeting of the Board of Directors on 20.11.2007 whereat the 26
scheme was proposed.
Article 166(a) of the Articles of Association of the transferee
company reads as under : -
"166(a). The quorum for a meeting of
Directors shall be one-third of the total strength of Directors (any fraction contained in that one-third being rounded off as one) or two Directors whichever is higher provided that where at any time the number of
interested Directors exceeds or is two-thirds of the total strength, the number of the remaining Directors that is to say, the number of Director who are not interested present at the meeting being not less than two shall be the quorum during such time."
The submission really ought to be that, in that event, there
was not a validly constituted Board of Directors of the transferee
company in view of Article 133 of the Articles of Association of the
company which reads as under :-
"133. The number of Directors shall not be less than three or until otherwise determined by a General Meeting, more than twelve,
excluding the debenture director if any.
If the two directors had vacated office there were only two
directors of the transferee company.
34. Mr. Mehta submitted that the directors have not vacated 27
office under Section 283(1)(h). He further submitted that one of the
directors, Mrs. Kanchan Kotwani had in any event been reappointed
as a director after she allegedly vacated office and that thereby there
were at least three directors on the Board of Directors of the
transferee company and at the meeting held on 20.11.2007. Lastly,
he submitted that even if these two submissions are answered
against him the resolution at the meeting of the Board of Directors is
not void in view of Section 290.
35. Mr. Mehta submitted that even assuming that there was a
violation of Section 295 on account of the transferee company having
furnished a guarantee in favour of the Punjab National Bank in
respect of the loans advanced to the transferor company, the said
directors, Mr.Ashok Kotwani and Mrs.Kanchan Kotwani had not
vacated their office under Section 283(1)(h). According to him,
Section 283(1)(h) does not apply to such a case.
He submitted that in the facts of the present case the
private company viz. the transferor company of which they are
directors, had not accepted a loan from the transferee company nor a
guarantee for a loan from the transferee company. In other words, 28
according to him, while Section 295 renders several transactions
impermissible, Section 283(1)(h) renders the directors liable to vacate
office only in certain cases, covered by Section 295.
36. Mr. Mehta's submission is well founded. There are various
transactions under section 295 which are impermissible without the
previous approval of the Central Government, only some of which are
specified in section 283(1)(h). Thus, under section 283(1)(h) the
office of a director does not become vacant for any violation of
section 295. It becomes vacant only in the limited category of cases
specified therein.
37. A view to the contrary would require re-writing section 283
(1)(h) which is not permissible. Indeed, if that was the intention of the
legislature, section 283(1)(h) would merely have provided that the
office of the director becomes vacant if he contravenes section 295.
There is nothing in section 283 or in section 295 which
warrants expanding the scope of section 283(1)(h).
38. This view is supported by the fact that under section 283(1)
(i) the office of a director shall become vacant if "he acts in
contravention of section 299". Section 299 requires a disclosure of 29
interests by a director. There are different interests specified in
section 299. For instance, it requires a disclosure by a director of
his interest not merely of a contract or arrangement but even in
respect of a proposed contract or a proposed arrangement entered
into or to be entered into by or on behalf of the company. Under
section 283(1)(i), the office of a director becomes vacant for any
contravention of section 299. The disability under section 283(1)(i)
operates in respect of any contravention of section 299. In contrast,
under section 283(1)(h) a director incurs the disqualification only in
respect of certain contraventions under section 295 and not all.
39. Thus, when there is a contravention of section 295 it is
necessary to examine whether it falls within the ambit of section 283
(1)(h) or not. If it does not, the office of the director does not become
vacant merely because there was a contravention of section295.
40. In the present case, there is indeed a contravention under
section 295(1)(c). Under section 295, no company shall give any
guarantee in connection with a loan made to any other person by any
private company, of which any such director is a director or member.
The expression "any such director" refers to a director of the lending 30
company. In the present case, the said Mr. and Mrs. Kotwani were
directors of both the companies. Thus, the transferee company was
prohibited from giving any guarantee in connection with a loan made
by any other person viz. Punjab National Bank to any private
company viz. the transferor company, of which the said Mr. and Mrs.
Kotwani were directors and members. However, section 283(1)(h)
does not include within its scope such a contravention of section 295.
Neither the said Mr. and Mrs. Kotwani nor the transferor company
accepted any guarantee for a loan from the company.
41. Thus, neither Mr. nor Mrs. Kotwani vacated office as
directors of either the transferor company or the transferee company.
42. Mr. Mehta further submitted that even assuming that Mr.
and Mrs. Kotwani had vacated office as directors of the transferee
company, there was a validly constituted Board of Directors and that
there was present the requisite quorum, at the said meeting held on
20.11.2007.
43(A). The transferee company had issued the guarantee on
5.6.2006. On this date, there were five directors on the Board of the
transferee company. Two of them viz. Ashok Kotwani and Mrs. 31
Kanchan A. Kotwani were also directors of the transferor company.
Even assuming that they vacated the office of directors of the
transferee company by virtue of Section 283(1)(h) the transferee
company had three other directors viz. Biswajit Ghosal, Krushnakant
Dharia and R. Rajangam. The said R. Rajangam and Krushnakant
Dharia resigned as directors with effect from 30.6.2006 and
30.6.2007 respectively. One Rajesh Nawathe and one Shashin Shah
were appointed as additional directors of the transferee company on
30.6.2007. They were subsequently appointed as directors of the
transferee company at the Annual General Meeting held on
28.9.2007.
At the Annual General Meeting the said Mrs. Kanchan A. Kotwani
was again appointed as a director of the transferee company. Mr.
Mehta submitted therefore that even assuming that she had vacated
office on 5.6.2006, she was re-appointed on 28.9.2007.
(B). On 20.11.2007 the said Mrs. Kanchan A. Kotwani, Rajesh
Nawathe and Shashin Shah were directors of the transferee company
and in any event, functioned as such. In the affidavit dated 5.3.2009,
apart from stating the above facts, it is expressly stated that these 32
three directors and the said Ashok Kotwani had attended the meeting
held on 20.11.2007. Thus, according to Mr.Mehta therefore, at least
three validly appointed directors were present at the meeting held on
20.11.2007.
44. Mr. Mehta therefore contended that, in any event, there
was a validly constituted Board of Directors of the transferee
company and that the resolution was passed validly on 20.11.2007.
45. Mr. Joy however contended that if Section 283(1)(h)
applies to the said two directors, the re-appointment of Mrs. Kanchan
A. Kotwani is in any event bad as it was sought to be done under
Section 256(3) which was not applicable inasmuch as she could not
be deemed to have retired on that date, having earlier vacated office
as a director. In that event, she ought to have been appointed
following the procedure under Section 257.
46. I heard counsel at some length on this question of law
raised by Mr. Mehta viz. that even assuming that the said directors
had vacated their office under Section 283(1)(h) there was a validly
appointed and functioning Board of Directors of the transferee 33
company and at the meeting held on 20.11.2007 there was the
requisite quorum as Mrs.Kanchan Kotwani had in any event been re-
appointed at the AGM held on 28.9.2007.
47. It is not necessary to decide this question of law in the
present case. Even assuming Mr. Joy's submissions on both the
points are correct, it would make no difference to the validity of the
resolution dated 20.11.2007. Mr. Mehta's reliance upon Section 290
of the Companies Act in this regard is well founded. Section 290 of
the Companies Act reads as under :-
"290. Validity of acts of directors.--Acts done by a person as a director shall be valid, notwithstanding that it may afterwards be discovered that his appointment was invalid by reason of any defect or disqualification or had terminated by virtue of any provision contained in this Act or in the articles: Provided that nothing in this section shall be deemed to give validity to acts done by a Director after his appointment has been
shown to the company to be invalid or to have terminated."
48. The least that must be said in favour of Mr. Mehta's
submissions, specially as regards the applicability of Section 283(1)
(h), is that it is more than just an arguable case.
49. The term "terminated" would include a director vacating 34
office by virtue of Section 283. This is clear from the words of Section
290 :-
".........had terminated by virtue of any provision contained in this Act........."
In that event, what is important to note is that, it can hardly
be suggested that the said two directors were cognizant or aware or
of the view that their appointment had terminated. They quite
obviously were oblivious of their alleged disqualification. Had they
been aware of the same they would have taken steps to remedy the
defect. There was no reason whatever for them to let the invalidity
continue.
I have no reason to believe that it had been shown to the
transferee company or its directors that the appointment of the said
directors had terminated. The mere fact that they knew the facts
constituting the disability or invalidity does not lead to an inference in
this case that they were aware of the consequences of these facts.
In that view of the matter, the proviso to Section 290 would
not operate to invalidate the acts of these two directors, done in the
meantime.
50. There is nothing to indicate that at the relevant time i.e. on 35
20.11.2007 it had been shown to the company or the said directors
that their appointment as directors had terminated. The Auditor's
Report indicates a violation under Section 295. That by itself does
not operate the proviso to Section 290 against the Petitioners. The
real question is whether the company/its directors were cognisant or
aware that they had vacated office in view of Section 283(1)(h). I
think not.
51. The question about the said directors vacating the office
was raised for the first time only in the affidavit filed on behalf of the
Regional director. Indeed, whether Section 283(1)(h) applies at all is
a moot question. The proviso to Section 290 does not operate in the
present case in view of the fact that there is nothing to indicate that
the company or either of the directors were of the view or had been
informed/shown by anyone that their appointment had been
terminated by virtue of the provisions of Section 295 read with
Section 283(1)(h).
52. Section 290 is vide in its scope. This is clear from the
words:
"invalid by reason of any defect or disqualification" 36
and the words :
"had terminated by virtue of any provision contained in this Act or in the articles."
53. Further, the scheme operates not merely qua the directors
but all the members and the creditors of both the companies.
54. Section 290 would also be applicable in cases such as this
where directors act despite there not being the minimum number of
directors required by the Articles of Association as a consequence of
one or more of the directors vacating office for any reason, such as,
under Section 283. There is no warrant to curtail the ambit of Section
290 by excluding such cases.
55. Thus, even assuming that the required number of directors
were not present at the meeting held on 20.11.2007 the same would
not invalidate the resolution.
56. In Shiromani Sugar Mills Ltd. v. Debi Prasad, AIR (37) 1950
Allahabad, 508, it was contended that the directors who voted for the
allotment of shares were disqualified to act as such directors and that
the allotment was therefore ultra-vires and of no effect. It was found
that the directors not having acquired the qualification shares had
indeed ceased to be directors under Section 85 of the Indian 37
Companies Act, 1913. Consequently, the resolutions allotting the
shares and making a call for the money were passed in a meeting in
which there was no quorum.
The Official Liquidator relied upon Article 181 which it was
held was couched in the same words as Section 86 of the Indian
Companies Act, 1913. It would be useful at this stage to set out
Article 181 and Section 86 which read as under :-
"Article 181 : "All acts done by any committee of Directors or by any person acting as a Director shall, notwithstanding that it be afterwards discovered that there are some defects in appointments of any such directors or persons acting as aforesaid or that they or any of them are disqualified, be as valid as if every such person have been duly appointed and was qualified to be a Director."
"Section 86 of the 1913 Act :
"The acts of a director shall be valid
notwithstanding any defect that may
afterwards be discovered in his appointment or qualification :
Provided that nothing in this section
shall be deemed to give validity to acts done by a director after the appointment of such director has been shown to be invalid."
The Division Bench held as under :-
"........................................................................ 38
......................................................................... The Official Liquidator relied upon Art. 181 which is couched in the same words as S. 86, Companies Act, 1913, by which we are
governed in these applications. This Article, widely worded as it is, supports his contention that in spite of the disqualifications of the Directors the resolutions passed by them are valid. In Hallows v. Fernie, (1867-3 ch. A 467 : 18 L. T. 34C) the objection to the allotment of shares on the ground that the Directors who made the allotment did not possess the
requisite-share qualification, was overruled on the basis of a provision in the English
Companies Act similar to that contained s.86, Indian Companies Act. In Dawson v. Afri. can Consolidated Land and Trading Co., (1898) 1 ch. 6 :(67 L. J. ch. 47) a call made by Nielson a Director, was upheld though he had parted with all his shares and thus become
disqualified and was not re-elected as such on acquiring fresh shares before the call was made. Chitty L. J. emphasised the words
"some defect in the appointment" and
expressed the view that the provision is not so framed as to render valid a resolution passed by any persons who without a shadow of title assume to act as Directors of a company. There was no defect in the appointment of Nielson as Director; he only became
disqualified subsequently on his parting with his shares. His acting as Director in spite of the disqualification was held to be exactly within the words of the Article and one of those defects, irregularities or whatever else one ought to call them which are remedied by Art. 114 which is in almost the same words as our Art. 181. An identical article again came 39
up for discussion in British Asbestos Co. Ltd. v. Boyd, (1903) 2 ch. 439 : (73 L. J. ch. 31). Farwell J. stated at page 444 :
"It is not, therefore, that the facts are not known, but that the knowledge of the defect is not present to the mind of any person to whom it is material at the time to know it. As it is put in Buckley on the Companies Acts, 8th Edn. p. 230, the object of an article like this and S. 67 of the General Act, is to make the honest acts of de facto Directors as good as the honest acts of de jure Directors."
In the present case, the Directors certainly knew that they had not paid the allotment and call moneys, but there is nothing to indicate that the fact that they had thereby disqualified themselves was present to their minds at the time when they allotted the shares and made the calls. There was no defect in their
appointment as Directors; the only defect is that they continued to act as Directors even after their disqualification. There is no suggestion that they acted dishonestly in passing the resolutions of allotment and making the calls. It seems that they acted bona fide, oblivious of the fact of their disqualification. There is no evidence of the fact of their disqualification having ever been brought to their minds. The language of Art. 181 fully protects their actions. Had it been a case of only one or to Directors continuing to act as such despite the disqualification, I would have had no hesitation in forming the conclusion that I have. Here we have to deal with a large number of Directors acting as such despite the qualification. But there is no 40
other circumstance from which it can be said that they were conscious of the fact of their disqualification and yet continued to act as Directors. So I come to the conclusion,
though not without some hesitation that the acts of allotting the shares to the opposite parties and making the first and second calls were valid."
57. I am in respectful agreement with the judgment of the
Division Bench of the Allahabad High Court. Although Section 86 of
the 1913 Act did not deal with the cases where the appointment of a
person as a director is terminated but dealt only with cases where the
appointment was invalid, the ratio of the judgment would apply
equally even in the cases where the appointment has been found to
be terminated by virtue of Section 283. The purpose of Section 290
is to ensure that acts done bona-fide are not annulled as the same
would adversely affect the rights of various third parties as well. In
any event, Article 181 which was relied upon by the Division Bench is
similar to Section 290.
58. Mr. Mehta's reliance upon the judgment of the Supreme
Court in Seth Mohan Lal & Anr. v. Grain Chambers Ltd., Muzaffarnagar
& Ors., AIR 1968 Supreme Court, 772 = (1968) 2 Supreme Court
Reports, 252, is also well founded. The Supreme Court having held 41
that Regulation 94 of Table A was deemed to be incorporated in the
articles of the company held as under :- "13. ................................................................. ........................................................................ It, therefore follows that Regulation 94 must be deemed to be incorporated in the Articles of Association of the Company. That
Regulation provided:
"All acts done by any meeting of
the directors or of a committee of directors, or by any person acting as a director shall, notwithstanding that it be afterwards
discovered that there was some defect in the appointment of any such directors or persons acting as aforesaid or that they or any of them were disqualified, be as valid as if every such person had been duly appointed and
was qualified to be a director."
There is no evidence that the directors were aware of the disqualification which would be incurred by entering into contracts of sale or purchase or supply of goods with the
Company without the express sanction of the directors. By the subsequent discovery that they had incurred disqualification, because they had entered into contracts with the Company for sale or purchase or supply of goods,the resolution passed by them is not rendered invalid. It is in the view we have taken, unnecessary to decide whether
Section 86 of the Indian Companies Act 1913 also grants protection to acts done by
directors who are subsequently discovered to be disqualified."
59. Thus, in any view of the matter the resolution dated
20.11.2007 is saved and cannot be held to be void.
60. It is however clarified that this order sanctioning the
scheme will not in any manner affect any action that may be taken by 42
any authorities for the contravention of Sections 295 or 297 or the
contentions of such authorities on any application that may be made
by the company or the concerned director for compounding.
61(i). In the circumstances, the Company Petition No.382 of 2008
is made absolute in terms of prayers (a) to (j) and Company Petition
No.382 of 2008 is made absolute in terms of prayers (a) to (i).
(ii). The Petitioner companies to pay costs of
Rs.7500/- each to the Regional director and to the Official
Liquidator, High Court, Bombay within six weeks from today.
62. The transferee company to lodge a copy of this order
and the scheme with the concerned Superintendent of
Stamps for the purpose of adjudication of stamp duty, payable,
if any, on the same within 30 days of obtaining the
authenticated and/or certified copy of this order.
63. Filing and issuance of the drawn up order is
dispensed with.
64. All concerned authorities to act on a copy of this order
duly authenticated by the Company Registrar, High Court,
Bombay.