D.H. Nasir, J.
1. Company Application No. 46 of 1995 has been made by Novopan India Limited (hereinafter referred to as 'the transferor company') and Company Application No. 47 of 1995 has been made by G.V.K. Hotels Limited (hereinafter referred to as 'the transferee company') under section 391 of the Companies Act, 1956 (for short, 'the Act'), seeking a direction of convene the meeting of the shareholders of the applicant companies for considering the proposed scheme of arrangement for amalgamation of the two companies. The scheme inter alia contemplates transfer of business, assets and liabilities of the transferor company to the transferee company and also allotment of shares of the transferee company to the shareholders of the transferor company. Both the companies are having their registered office at Hyderabad. One of the main objectives of the transferor and transferee companies is to establish a complex of industries manufacturing particle boards and to conduct business in such product. The reasons for amalgamation are set out on page 10 of the affidavits filed in support of the applications. It is also stated that the board of directors of both the companies approved the scheme of amalgamation. On a perusal of the averments made in the affidavits filed by the transferor and transferee companies an order was passed by my learned brother, P. Venkatarama Reddi J., on March 29, 1995, in both these applications holding that there was no legal impediment for ordering meetings to be convened for the purpose of considering the scheme of amalgamation by laying certain conditions.
2. As per the above directions, Mr. P. Nagaseshaiah and Mr. K. Padmanabha Goud were appointed as chairmen to convene and hold meetings of the shareholders of the transferor and transferee companies respectively. They reported that a unanimous resolution was passed at the meeting of the shareholders of both the companies held on April 26, 1995, as follows :
'Resolved that a scheme of amalgamation of Novopan India Limited with G.V.K. Hotels Limited, and arrangement between G.V.K. Hotels Limited, and its members including capital restructuring by way of reduction and consolidation of share capital of the transferee company in terms of the draft/scheme laid before the meeting duly initialled and signed by the chairman for the purpose of identification be and is hereby approved subject to such alterations and modifications thereof, if any, as may be directed by the High Court of Andhra Pradesh, Hyderabad.'
3. In the order dated March 29, 1995, it is further observed that there were only secured creditors of which the Industrial Development Bank of India (for short 'the IDBI') was the lead institution and that the IDBI and other secured creditors had no objection if the meeting of the creditors was dispensed with, subject to the condition that the applicants shall produce the consent letters issued by the secured creditors before the chairman of the meetings and that the chairman may also incorporate a clause in the advertisement to be published in the newspapers to the effect that objections, if any, for the proposed amalgamation are invited from the creditors to reach the chairman on or before the proposed meeting. A further direction was given to the effect that the chairman shall act in accordance with rules 70, 76 to 78 of the Companies (Court) Rules, 1959 (for short 'the Rules'), and that voting by proxy shall be permitted as prescribed under section 176 of the Act read with the articles of association.
4. A notice was served on the Central Government under section 394A of the Act. Sri S.N. Jeya, Registrar of Companies, was authorised of file a counter-affidavit on behalf of the Regional Director, Southern Region, Department of Company Affairs, Madras, vide letter No. 5/AP/118/95, dated July 7, 1995. In his counter-affidavit, the Registrar of Companies states that on examination of the scheme of amalgamation, it is observed that this is composite application for merger and capital reduction. He further states that in the case of amalgamation of PMP Auto Industries Ltd. and S.S. Miranda Limited with Morarjee Goculdas Spinning and Weaving Co. Limited [1994] 80 Comp Cas 289 (Bom), the Bombay High Court held that the provisions for sanction of the scheme by the court contemplated a single window clearance and that except for reduction of capital, the court can sanction a scheme of amalgamation for the benefit of the company. In the said decision, the Bombay High Court concurred with the views expressed by the Gujarat High Court in the case of Maneckchowk and Ahmedabad ., In re [1970] 40 Comp Cas 819.
5. The Registrar of Companies further states that the transferee company in its petition has prayed for reduction of capital and further issue of shares to members of the transferor company on the basis of the exchange ratio, which itself is calculated after such reduction of capital. According to the Registrar, in fact, for reduction of capital, a separate set of procedure had to the followed as laid down in rules 46 to 65 of the Rules. He further states that in terms of section 101(2) of the Act, the proposed reduction involved not only diminution in liability or payment of shareholders, but also 'in any other case', the court may direct the petitioners to obtain the consent of creditors. He further states that it could be seen from the petition filed by the transferee company that the IDBI as a lead financial institution had given permission only for reserve merger and not for reduction of capital. This apart as per the outstanding position of loans as on March 31, 1994, the transferee company had obtained secured loans not only from IDBI, but also from Canara Bank and Bank of India, whose consent for capital reduction was wanting. He further states that the consent of such other creditors as unsecured or sundry creditors should also be obtained. He further submits that the transferee company had adopted Table A and the benefit of article 46 of Table A of Schedule I is available, but no special resolution was passed in this regard, except a resolution under section 391 of the Act. Further, according to him, if a special resolution was passed, it should have been supported by an explanatory statment under section 173 of the Act, spelling out the reasons for and advantages of capital reduction. The statement under section 393 of the Act did not specifically state why capital reduction was sought for and how it was advantageous to the members of the transferee company. It that view of the matter, therefore, the Registrar of Companies submitted that the court may be pleased to direct the transferee company to observe the provisions relating to reduction of capital.
6. The Registrar of Companies further submitted that section 102(2) of the Act specifically provides that if the capital is reduced, the company whose capital is so reduced, shall add to its name as the last words thereof, the words 'and capital reduced'. He further submitted that even after merger, irrespective of the fact, whether the procedure required for capital reduction was adopted or not, the consolidated post merger paid-up capital of the transferee company will be Rs. 992.88 lakhs, which will be less than Rs. 1,478.75 lakhs being the pre-merger position obtaining as on March 31, 1994. In that view of the matter, therefore, according to the Registrar of Companies, the transferee company could not dispense with the procedure to be followed for capital reduction.
7. The Registrar of Companies further submits that as per the terms of appointment, Mrs. Indira Krishna Reddy would continue to hold the office of managing director of the transferee company only up to August 9, 1995. However, the scheme of amalgamation proposed for continuance of her tenure on the same terms and conditions after amalgamation, but such continuance of her tenure after amalgamation on the same terms and conditions would require the approval of the post-members of the transferee company, and, therefore, it was necessary that the issue be left to be decided by the post-amalgamation members of the transferee company on the basis of the financial position as on March 31, 1995.
8. The Registrar of Companies further submitted that the scheme under para 1(a) of Part V provided for a change of name of the transferee company, which was outside the purview of the scheme. Further, according to him, the transferee company had to comply with the requirements under section 21 of the Act, and was also required to take steps to obtain a fresh certificate of incorporation from the Registrar of Companies, Andhra Pradesh, Hyderabad, which was not possible at this stage, and, therefore, the High Court may pass appropriate orders for deletion of the said clause from the scheme.
9. As stated earlier, the meeting of the shareholders of the petitioners (transferor and transferee companies) was held on April 26, 1995, for considering the scheme of amalgamation of the transferor company with the transferee company and also arrangement between the transferee company and its members, and that a unanimous resolution was passed at that meeting approving the scheme of amalgamation and arrangement which has already been extracted above. The official liquidator has also filed his report in terms of second proviso to sub-section (1) of section 394 of the Act, stating that the affairs of the transferee company have not prima facie been conducted in a manner prejudicial to the interest of its members or to public interest.
10. The managing director of the transferee company in his reply affidavit stated that the consent of all the creditors of the transferee company, namely, the IDBI, the lead financial institution and banks of the transferee company had been obtained to the proposed reduction of share capital. The consent letters received from the lead financial institutions and Canara Bank, being the lead bank of the scheme of amalgamation and arrangement have been annexed with the reply affidavit. There is, therefore, no need to call for a separate meeting of the creditors for sanctioning the scheme of arrangement between the transferee company and its members. As regards the reappointment of the managing director of the transferee company, it is stated in the reply affidavit that the sanction of the board of directors and subsequent ratification of the shareholders of the transferee company were required, and that the necessary sanction would be obtained as and when the High Court approved the scheme of amalgamation and arrangement.
11. It is further stated in the reply affidavit filed by the managing director of the transferee company that the name of the transferee company was proposed to be change to Novopan Industries Limited and that it had applied to the Registrar of Companies for making the name available for adoption. The Registrar of Companies, vide his latter dated June 23, 1995, had made the said name available for adoption. Further according to him, under the provisions of the Act, the shareholders of the transferee company had to approve the said change and the transferee company had to comply and follow the procedure contemplated under provisions of the Act. As the change of name could be effected only on the scheme being sanctioned, there was no need to delete the said clause from the scheme. I do not find any irregularity about the proposition that there was no need to delete the relevant clause from the scheme in view of the fact that the change of name could be effected only on the scheme being sanctioned.
12. We shall now deal with the objection taken by the Central Government with regard to the procedure to be followed in cases where reduction of share capital was involved.
13. The issued, subscribed and paid-up share capital of the transferee company is proposed to be reduced from Rs. 14,78,74,800 divided into 1,47,87,480 equity shares of Rs. 10 to Rs. 2,95,74,960 divided into 1,47,480 equity shares of Rs. 2 each, such reduction to be effected cancelling the paid-up share capital to the extent of Rs. 8 per equity share.
14. Forthwith upon such reduction of the share capital taking effect, 1,47,87,480 equity shares of Rs. 2 are proposed to be consolidated in such a manner that every five shares of Rs. 2 shall constitute one equity share of Rs. 10 fully paid-up. A clause is also proposed to be added to the scheme of capital restructuring that the transferee company shall not be required to use the words 'and capital reduced' is part of the corporate name, and such usage is proposed to be dispensed with.
15. The debenture holders of 1,75,500 redeemable non-convertible debentures of Rs. 65 each in the transferor company are proposed to be allowed an identical number of non-convertible debentures by the transferee company and such debentures are proposed to be secured by the same assets now constituting the security and are proposed to carry the same rights which are presently enjoyed.
16. With regard to the objection taken by the Central Government to the effect that a separate set of procedure had to be followed in cases where reduction of capital was involved, as laid in rules 46 to 65 of the Rules, it is submitted by the Central Government that in the case of PMP Auto Industries Limited and S.S. Miranda Limited with Morarjee Goculdas Spinning and Weaving Co. Limited [1994] 80 Comp Cas 289 (Bom), the Bombay High Court held that the provisions for sanction of the scheme by the court contemplated a single window clearance and that except for reduction of capital, the court could sanction a scheme of amalgamation/arrangement for the benefit of the company. It was further argued that the Bombay High Court concurred with the views expressed by the Gujarat High Court in the case of Maneckchowk and Ahmedabad Manufacturing Co. Limited, In re, [1970] 40 Comp Cas 819.
17. In the case of PMP Auto Industries Ltd., In re [1994] 80 Comp Cas 289, the Bombay High Court observed on page 297 that in Maneckchowk and Ahmedabad Manufacturing Company Limited, In re [1970] 40 Comp Cas 819, a case which arose before the Gujarat High Court, a scheme of amalgamation was put forward before the court for sanction under section 394 of the Act. The proposed scheme itself envisaged reorganisation of the share capital including the reduction of the share capital. An objection was raised that inasmuch as the district and different procedure had to be adopted for reduction and increase of share capital under the Companies Act, it was not permissible for the court to sanction a scheme involving reduction and increase of share capital while exercising its powers under section 394 of the Act. The Gujarat High Court rejected this contention by holding that section 391 of the Companies Act was a complete code which provided for a scheme of reconstruction and amalgamation of companies which could conceivably include a reorganisation of the share capital of the company by consolidation of shares of different classes or by division of shares or by both these methods. The Gujarat High Court referred to rule 85 of the Companies (Court) Rules, 1959, which specifically provided that where a proposed compromise arose involving the share capital of the company, the procedure prescribed by the Act and the rules relating to the reduction of capital and the requirements of the Act and the Rules and Regulations thereto shall have to be complied with before the compromise or arrangement, so far as it relates to the reduction of capital, is sanctioned. From this rule, the Gujarat High Court deduced (at page 854) :
'If section 391 were not to be treated as complete code and if it is intended that various things that can be done way of a scheme of compromise and arrangement, if they were to fall under different provisions of the Companies Act which prescribe certain procedure for doing the same and that procedure has to be gone through, it was not necessary to provide specifically that if the scheme of compromise and arrangement includes reduction of capital special procedure in respect of reduction of capital must be gone through before it could be sanctioned as part of the scheme of compromise and arrangement. There seems to be good reason for making such a provision in rule 85 ...'
18. It, therefore, becomes necessary for us to have another look at the decision of the Gujarat High Court in the case of Maneckchowk and Ahmedabad Manufacturing Co. Limited, In re [1970] 40 Comp Cas 819, in which it is observed that the scheme as finally submitted to the court for its sanction envisaged reorganisation of the share capital of the company which included reduction of the share capital by reducing the face value of the ordinary share of Rs. 1,000 fully paid to Rs. 250 fully paid, and preference share of Rs. 100 fully paid to Rs. 25 fully paid. The scheme proposed increase of share capital by issue of shares to the unsecured creditors of the company excluding the workers to the tune of 50 per cent. of the verified claim of each unsecured creditor. The scheme envisaged dismantling and scrapping of unit No. II of the mills of the company and the sale proceeds to be utilised towards the payment to the secured creditors, namely, Union Bank of India and the Regional Provident Fund Commissioner. After Unit No. II was scrapped, the open land was to be let out to the intending lessee to fetch a steady income. It was proposed to restart Unit No. I of the mills of company. The secured creditors were to be paid in full in the manner set out in the scheme. The balance of 50 per cent. of the claim of the unsecured creditors was to be frozen for a period of two years, and, thereafter, the said claims were to be satisfied as provided in the scheme. The dues of the workers were to be paid in certain stages. The sanctioning of the scheme was objected to, inter alia, on the following grounds :
1. The petitioner had not satisfied the requirements contained in the proviso to section 391(2) by not making necessary disclosures at the proper time.
2. The proposed scheme was not a proper alternative to an order for winding up the company in view of the fact that the company was guilty of giving a number of fraudulent preference.
3. The proposed scheme envisaged reorganisation of share capital, including reduction and increase of share capital, which could not be done without going through the whole gamut of the procedure prescribed for the same and as it was in inseverable part of the scheme, it would be futile to sanction the reminder of the scheme in its mutilated form.
4. In the absence of proper directions for convening separate meetings of different classes of creditors and members of the company, appropriate meeting of distinct classes of members and creditors were not held and therefore, it was not possible to say that the proposed scheme had been approved by the requisite majority of different classes of creditors and members.
5. A proper statement as required by section 393(1) and as directed by the court's order dated June 26, 1968, was not sent along with the notice convening the meetings of members and creditors of the company.
6. In fact the scheme was not approved by a statutory majority or creditors and members; but assuming that the other view is possible, the court on the analysis of votes recorded at the meeting should not exercise is discretion in favour of the scheme so as to impose it on the dissenting members and creditors.
7. The scheme was not commercially and economically viable or feasible and was in fact unfair and unreasonable and the court should not exercise its discretion in favour of such a scheme.
19. It is further stated in the said decision that the court overruled the objections and sanctioned the scheme with certain modifications to ensure and facilitate the proper working of the scheme. In overruling the objections the court laid down general principles governing the sanctioning of schemes for compromise and arrangements with members and creditors and made the following propositions on the interpretation and object of the relevant provisions of the Companies Act :
(i) The court is exercising its discretion in sanctioning a scheme of compromise with members and creditors under section 391(2) of the Companies Act, treated it as a cardinal rule that its function does not extend to usurping the view of the members or creditors. It must look at the scheme to see that it is a reasonable one and, while doing so, the court will be strongly influenced by a big majority vote and the reasons which actuated the contesting creditors in opposing the scheme. None the less it must be an equitable one though it is none of the business of the court to judge upon the commercial merits which in fact is the function of the creditors and members.
(ii) The scheme has not got to be scrutinised by the court with that much care with which an expert will scrutinise it, no will it approach it in a carping spirit with a view to pick holes in it. If the majority is acting in a bona fide and honest manner, and in the interests of the class that it purports to represent, then, if the scheme is such which a fair minded person, reasonably acquainted with the facts of the case as prevailing at the time when the scheme was sponsored and approved, can regard it as beneficial for those whom the majority seeks to represent, then, unless there are some strong and cogent grounds to show that the scheme was conceived, designed or calculated to cause injury to others, the court will ordinarily sanction it, rather than reject it. While examining the scheme the court should, keeping in view all the aspects of the matter, prefer a living scheme to compulsory liquidation bringing about an end to a company.
(iii) Before the court accords its sanction to any scheme of compromise and arrangement, it would normally expect to be satisfied about three important matters, namely, (a) whether the statutory provisions have been complied with or not; (b) whether the class or classes have been fairly represented; and (c) whether the arrangement is such as a man of business would reasonably approve.
(iv) Sections 391(1) and 391(2) of the Companies Act refer to two distinct stage. Whenever a compromise or arrangement is proposed between a company and its creditors or any class of them or between a company and its members of any class of them, the court on the application of the company or any creditor or member of the company or in the case of a company which is being wound up, of the liquidator, has to order a meeting of the creditors or members or any class of them.
It was obligatory upon the applicant under section 391(1) of the Companies Act to set out in an affidavit the particulars required in Form No. 34, as stated in the aforesaid decision of the Gujarat High Court. The details required to be mentioned in the affidavit have been so prescribed and to enable the court to give proper directions and no disclosures are required to be made as required by the proviso at that stage. It was not possible to accept the view that disclosures as required by the proviso should be made at the initial stage when the application was made under section 391(1); these disclosures are required to be made only when a petition is filed under section 391(1) for sanctioning the scheme and must be available when the court proceeds to examine the scheme to find out whether sanction should be accorded to it or not.
The court at the initial stage is concerned with the financial position of the company in its broad outlines. The court would primarily be concerned with the assets and liabilities of the company; a few minor details here or there would not be of any consequence while considering the scheme of compromise and arrangement. These details may be of importance when the claim of each creditor que the company was being concerned; but while considering the scheme of compromise and arrangement, the court, more particularly, was concerned with the assets and liabilities of the company. . . .
(ix) The provisions contained in section 391 are a complete code, and as a necessary corollary, if the scheme of compromise and arrangement includes reorganisation of share capital except reduction of share capital, it can one sanctioned as part of the scheme of compromise and arrangement. In the case of reduction of share capital as part of the scheme of compromise and arrangement, rule 85 will have to be given full effect.
If a scheme has been approved by a statutory majority and if the scheme is to be sanctioned, as part of such a scheme of reorganisation of the share capital, except the reduction of share capital, can be sanctioned. It will be necessary to find out whether the procedure prescribed for effecting reduction of share capital has been gone through or not.
(x) Sub-section (1A) of section 81 permits issue of further shares to persons other than existing ordinary shareholders of the company. It cannot, therefore, be said that issue of further shares to persons other than the existing shareholders of the company, e.g., creditors, is wholly barred. It would only require a special resolution to that effect passed by the company in the general meeting. If, therefore, a special resolution for issue of further shares after increasing the capital to persons other than the existing shareholders of the company, is passed in a general meeting of the company, section 81 would not be contravened....
(xii) There is no general rule for determining whether a particular provision in a statute is mandatory or directory. The court must look at the propose for which the provision is made, its nature, and intention of the Legislature in making the provision to find out whether it is directory or mandatory. The use of the word 'shall' is not decisive of the matter.
The requirement of setting out the intention to move a resolution as a special resolution in the notice could not be said to be such a mandatory requirement, that the failure to comply with it would invalidate the resolution. The purpose behind enacting this provision and its nature and the intention of the Legislature and the general inconvenience that the failure to observe it is likely to cause to members, all go to show that the requirement to set out the intention to move a resolution as special resolution could not be mandatory. The requirement that the resolution ought to be adopted as special resolution is mandatory, but the setting out of the requisite intention in the notice convening the meeting could not be mandatory but only directory. Considering the provision in just a position with clauses (b) and (c), it would appear that the provision contained in clause (a) is directory and it is sufficient if it is substantially complied with.
(xiii) Though fresh capital cannot be issued without the permission of the Controller of Capital Issues under the Capital Issues (Control) Act, 1947, section 3, where a scheme envisages increase of capital the fact that permission for issue of fresh capital was not obtained from the Controller of Capital Issues need not come in the way of the court considering the scheme because that part of the scheme can come into operation after obtaining the permission of the Controller of Capital Issues.
(xiv) Where a scheme proposed that in order to write off the loss of capital, the share capital is being reduced by reducing the face value of ordinary shares of Rs. 1,000 fully paid-up to Rs. 250 fully paid-up, and cumulative redeemable preference shares of Rs. 100 fully paid-up to Rs. 25 fully paid-up and after the reduction of the face value, the shares will be allotted and issued to unsecured creditors in satisfaction to 50 per cent. of their claims, it cannot be said that the issue of the shares to the unsecured creditors was either at a discount or for no consideration or for consideration otherwise than cash, as in fact for every ordinary share of Rs. 250 issued, the liability of the company to the unsecured creditors would be proportionately decreased and wiped out. Since for each share issued to the unsecured creditor the liability of the company for the amount equivalent to the face value of the share would stand discharged or the company would be discharged from equivalent amount of debt due from the company to the unsecured creditor, such arrangement is quite legitimate and can be the subject-matter of compromise and arrangement between the company and its members and creditors and, if it is otherwise reasonable and fair, must be given effect to. At any rate, it cannot be thrown out on the ground that on the one hand the share would fetch no price if it is sold in the market and the claim of the creditor being a chose-in-action has a debatable value or is of no value....
(xvi) If the reduction of share capital proposed in a scheme does not involve either diminution of liability in respect of unpaid share capital or payment to any shareholder of any paid-up capital, the court can sanction the same without reference to the creditors.
(xvii) There is nothing objectionable in the company proposing a scheme of compromise and arrangement and simultaneously proposing reduction of share capital and both can be considered and approved simultaneously.
(xviii) Where the scheme of compromise and arrangement comprises within its ambit reduction of share capital, the procedure for reduction must be gone through, but if it is shown that the procedure prescribed under section 100 onwards has been carried out simultaneously while submitting the scheme for approval of the creditors and members, the court can, while sectioning the scheme, sanction reduction of share capital. The important thing to find out would be whether the procedure for reduction of share capital wherever it is mandatory had been strictly carried out and wherever it is directory has been substantiality complied with.
(xix) When the capital is reduced by cancelling any paid-up share capital which is lost or is otherwise unrepresented by available assets, it is not mandatory to follow the procedure prescribed in sub-section (3) of section 101 unless the court so directs.....
(xxv) The essential requirement of section 393(1)(a) is that the creditors and members who are the assemble in the meeting should have advance information of the proposed scheme of compromise and arrangement and its effect on their interest as members and creditors. If the whole of the proposed scheme was annexed to the notice, anyone having a bare perusal of the scheme would be able to find out what was intended to be done by the scheme of compromise and arrangement and what would be its effect on his interest as creditor or member of the company and the first part of clause (a) of section 393(1) will be fully complied with.
(xxvi) In respect of the latter part of clause (a), it must be stated that the material interest of the director and managing director in their capacity as such or as a creditor or a member of the company will have to be stated in the statement; but the effect of the scheme on their interest will have to be disclosed to the extent that effect differs from the effect on the like interest of other creditor and member that would be made by the scheme. If there is not difference, it is not essential that the effect of the scheme on the interest of the director and managing director and others need be set out in the statement.....'
20. Rule 85 of the Companies (Court) Rules, 1959, provides that where a proposed compromise or arrangement involves a reduction of capital of the company, the procedure prescribed by the Act and these Rules relating to the reduction of capital, and the requirements of the Act and these Rules in relation thereto, shall be complied with, before the compromise or arrangement so far as it relates to the reduction of capital, is sanctioned.
21. Rule 47 of the Rules provides that, upon the hearing of the summons, if the judge is satisfied that the proposed reduction does not involve either diminution of liability in respect of unpaid share capital or payment to any shareholder of any paid-up share capital and does not think fit to direct that the procedure prescribed in section 101(2) shall apply, he shall fix a date for hearing of the petition and give such directions as he may think fit as to the advertisement of the petition. The petition shall be posted for hearing on the date fixed, and upon the hearing thereof, the judge may confirm the reduction on such terms and conditions as he may think fit.
22. Section 100 of the Act provides for reducing the share capital of a company by a social resolution extinguishing or reducing the liability on any of its shares in respect of share capital not paid-up or either with or without extinguishing or reducing liability on any of its shares, cancelling any paid-up share capital which is lost, or is unrepresented by available assets or either with or without extinguishing or reducing liability on any of its shares, pay off any paid-up share capital which is in excess of the wants of the company, and may, if and so far as is necessary, alter its memorandum by reducing the amount of its share capital and of its shares accordingly. Under sub-section (2) of section 100 of the Act it is provided that a special resolution under this section is in this Act referred to as 'a resolution for reducing share capital.'
23. Section 101 of the Act provides for application to the court for confirming order, objections by creditors, and settlement of list of objecting creditors.
24. In the instant case, the transferee company proposes to cancel its paid-up share capital which is lost or is unrepresented by available assets. As against the share capital of Rs. 14.79 crores as on March 31, 1994, the transferee company had accumulated losses to the extent of Rs. 15.76 crores resulting in erosion of its paid-up share capital. The proposed reduction of capital in the instant case involves only an adjustment of unrepresented share capital to the extent of Rs. 11.83 crores leaving a balance of unrepresented capital to the extent of Rs. 3.93 crores, and this arrangement does not involve any loss to the creditors considering the fact that this is only an unrepresented loss which is sought to be adjusted against the share capital by way of reduction and the total assets and liabilities of the transferee company do not indicate any change.
25. There is also a substantial compliance with rule 85 of the Rules as the proposed reduction of the share capital is already approved by the shareholders unanimously and the creditors have given their consent for the proposed scheme of arrangement. For this purpose, it is necessary to take into consideration the contents of the letter dated December 9, 1994, addressed to the transferee company by the IDBI, by which is communicated its 'no objection' to the proposed reverse merger of the transferor company with the transferee company with effect from April 1, 1994, on the terms contained in the scheme of merger with a share exchange ratio of five fully paid-up equity shares of the face value of Rs. 10 each of the transferee company for every one fully paid-up equity share of the face value of Rs. 10 each of the transferor company. It has also been stated in the said letter that the conversion option resting with the institutions in respect of terms loans sanctioned to the transferee company would be exercised after the merger. If the formalities regarding the merger are not completed by the last date of exercise of conversion in terms of the loan agreements executed, the period of conversion shall get automatically extended by the time taken for completion of the merger formalities from the date of its letter. Lastly, it is mentioned in the said letter that the approval is given on behalf of all the participating financial institutions. By another letter of the IDBI dated May 18, 1995, addressed to the transferor company stating that during the meeting of the institutions to consider the merger proposal, it was decided that for arriving at the exchange ratio, the high and low figures of market quotations for the last one year for both companies may be considered along with the calculations done by Lovelock and Lewis. Based on the same, the exchange ratio of one share of Novopan India Limited for five shares of GVK Hotels Limited has been arrived at. By letter dated August 16, 1995, the IDBI confirmed that the merger scheme approved by them included reduction of share capital of GVK Hotels Ltd. by 4/5ths, i.e., from Rs. 1,478.75 lakhs to Rs. 295.75 lakhs. The Canara Bank by its letter dated August 11, 1995, addressed to the transferor company stated that, 'we, the lead banker, hereby convey court approval for the reverse merger as well as the reduction of share capital of GVK Hotels Limited from Rs. 1,478.75 lakhs to Rs. 295.75 lakhs'. The Canara Bank by another letter dated August 14, 1995, addressed to GVK Hotels Limited stated that it approved of the reverse merger subject to certain conditions, such as similar approval by other member institutions, the IDBI and other connected authorities. The merger should not result in dilution of securities given to the bank, and after the merger, the total borrowings of the company should be within the MPBF of the merged company under lending method II. The company should submit for approval of the High Court the merger proposal and that merger would be subject to the approval of the shareholders and such others as may be required.
26. From the report dated April 27, 1995, submitted by the chairmen of the meeting of the equity shareholders of the transferee company, it becomes abundantly clear that the scheme of amalgamation and arrangement was read over and explained by him to the shareholders present in the meeting and that unanimous resolution approving the scheme of amalgamation and restructuring of spatial of the transferee company by way of reduction and consolidation of share capital was passed. It also becomes evident from the perusal of the notice convening the meeting of the shareholders that copies of the scheme of amalgamation and the statement under section 393 of the Companies Act were circulated. The scheme with regard to reduction and consolidation of the share capital was also included in the statement under section 393 of the Act. The particulars of shares held by the transferor company and the transferee company had also been set out in the scheme. It was also notified that the documents relating to the scheme of amalgamation of the transferor company with the transferee company and the arrangement between the transferee company and its members as well as the memorandum and articles of association of the transferor and transferee companies and the balance-sheet and profit and loss account of the transferee company and on March 31, 1994, were available for inspection at the registered office of the company at Hyderabad.
27. A note is also required to be taken of the fact that by order dated March 29, 1995, this court in C.A. Nos. 46 and 47 of 1995 made an observation to the effect that as far as creditors were concerned, it was stated that the IDBI was the lead institution and the other secured creditors had expressed no objection for the amalgamation. The letter dated December 9, 1994, addressed to the managing director of the transferee company by the IDBI was filed as annexure A-6, according to which the IDBI had no objection to the opposed merger of that who companies with effect from April 1, 1994, on the terms contained in the scheme of merger. It is further stated that there were no unsecured creditors, and therefore, it was felt that the meeting of the creditors need not be convened provided the letters expressing no objection by the concerned secured credits were placed before the chairman of the meeting.
28. In view of the above observation in the order to was not necessary for the transferor/transferee companies to report compliance with the requirements of section 102 of the Act, because as far as the secured creditors were concerned, their no objection was placed before the members by the chairman of the meeting and the same have also been produced before the court.
29. It is also true, as contended by the transferor and transferee companies, that while sending notice to the shareholders a statement as required under section 393 of the Act had been sent along with the copy of the scheme of amalgamation of the transferor company with the transferee company and arrangement between the transferee company with its members. Sufficient material was, therefore, available with the shareholders, which could be treated as substantial compliance with the provisions of section 173 of the Act which provides for an explanatory statement to be annexed to the notice. The sole purpose of calling the meeting was to consider the scheme of amalgamation and arrangement. There was no other item of business to be transacted at that meeting, and therefore, there is no reason why the resolution proposed and passed by the shareholders could not be treated as satisfying all the requirements of the special resolution, more particularly, in view of the fact that it was passed unanimously. The Gujarat High Court also observed in Maneckchowk and Ahmedabad .'s case [1970] 40 Comp Cas 819 that the requirement of setting out the intention to move a resolution as a special resolution in the notice could not be said to be such a mandatory requirement that failure to copy with it would invalidate the resolution.
30. It was further submitted by learned counsel that the ensure of the managing director of the transferee company expired on August 9, 1995, and therefore, the proposal with regard to her reappointment became infructuous. He further submitted that for reappointment as managing director of the transferee company the sanction of the board of directors and subsequent ratification by the shareholders of the transferee company was required, and that the necessary sanction would be obtained as and when the court approved the scheme of amalgamation at the appropriate time.
31. Learned counsel further submitted that on the approval of the scheme by the court and the scheme of amalgamation becoming effective the name of the transferee company would be changed to Novopan Industries Limited subject to such other approvals as may be necessary in that regard. He further submitted that the transferee company had already applied to the Registrar of Companies at Hyderabad for making the name available for adoption, and that by letter dated June 23, 1995, the Registrar of Companies had made the said name available for adoption. He further submitted that under the provisions of the Act, the shareholders had to approve the said change and the transferee company had to comply and follow the procedure contemplated under the provisions of the Act. It is true that since the change of name would be effective only on the scheme being sanctioned by the court there was no need to delete the said clause from the scheme for the being. In clause (a) of Part V of the scheme, it is clearly stated that the proposed change in the name of the transferee company shall be subject to such approval as may be necessary in that behalf which obviously makes it incumbent upon the transferee company to company with the provisions of section 21 of the Act.
32. With the above situation in view, let us now consider the effect of the decision of the Gujarat High Court in Maneckchowk and Ahmedabad .'s case [1970] 40 Comp Cas 819. The court indeed has very exhaustively examined the scope of sections 391 and 394 of the Act relating to amalgamation and elaborately laid down the principals to be kept in view in the case of the proposal for amalgamation, some of which, relevant for purpose, have already been extracted above. One such principle as contained in item (ix) reads as under :
'In the case of reduction of share capital as part of the scheme of compromise and arrangement, rule 85 will have to be given full effect. If a scheme has been approved by a statutory majority and if the scheme is to be sanctioned, as part of such a scheme, reorganisation of the share capital, except the reduction of share capital, can be sanctioned. It will be necessary to find out whether the procedure prescribed for effecting reduction of share capital has been gone through or not.'
33. Under section 102 of the Act, the court can make an order confirming the reduction on such terms and conditions as it thinks fit, if the court is satisfied with respect to every creditor who under section 101 is entitled to object to the reduction, that either his consent to the reduction has been obtained or his debt or claim has been discharged.
34. We have already seen above that the creditors of the transferee company have consented to the reduction of share capital. The requirement of rendering necessary satisfaction to the court under section 102(1), therefore stands complied with.
35. In the instant case, the proposed reduction of share capital does not involve either the dimunition of liability in respect of unpaid share capital or payment to any shareholder of any paid-up share capital. The provisions of clauses, A, B, and C of sub-section (2) of section 101 of the Act, are, therefore, not attracted. But the proposal of reduction of share capital falls under clause (b) of sub-section (1) of section 100 of the Act which provides that the company may reduce its share capital by a special resolution either with or without extinguishing or reducing the liability on any of its shares, cancel any paid-up share capital which is lost or is unrepresented by a available assets, if the company is so authorise by its articles, and subject to confirmation by the court, the court may alter its memorandum by reducing the amount of its share capital and of its shares accordingly.
36. Clause 3(a) of the articles of association of the transferee company provides for power to reduce the capital. For the court to accord confirmation, the provisions of section 101 of the Act could therefore very well be looked into. As already stated above, in a case where the reduction of share capital involves either the diminution of liability in respect of unpaid share capital or the payment of any paid-up share capital to any shareholder, compliance with the procedure laid down in clauses (a), (b) and (c) of sub-section (2) of section 101 of the Act is mandatory, but 'in any other case' as stated in sub-section (2) thereof, compliance with such procedure as laid down in clauses (a), (b), and (c) of sub-section (2) of section 101 of the Act is left to the discretion of the court, because the expression 'if the court so direct' is used in the provision. The case before us is that of cancellation of paid-up share capital to the extent of Rs. 8 per share, which is lost and unrepresented by available assets.
37. It is, therefore, clearly not incumbent upon the court to direct compliance with the procedure laid down in clauses (a), (b) and (c) of sections 101 and 102 of the Act. Under the given circumstances, it is open to the court to ascertain whether substantial compliance with those requirements is noticed from the process of implementing the scheme of amalgamation and arrangement. It is needless to repeat that substantial compliance with this requirement is amply reflected from the steps taken for obtaining the sanction of the court to the scheme of amalgamation and arrangement.
38. I believe that this view is neither incompatible with the requirements of law nor inconsistent with the view taken by the Gujarat High Court in point No. (xviii) in Maneckchowk and Ahmedabad .'s case [1970] 40 Comp Cas 819. It is, therefore, not just and proper to discard the proposal of restructuring of capital included in the scheme, on the ground that the requirements of section 101 of the Act have not been complied with.
39. Clause (a) of sub-section (2) of section 102 of the Act also provides that the court may, if for any special reason it thinks proper so to do, direct the company to add the words 'and reduced' to its name as the last words thereof during the period commencing from the date of the court's order till such time as the court specifies in its order. In the instant case, no special reason is shown by the Central Government to be existing which may call for giving such direction to the company. Nothing has also come to the notice of the court which may give rise to exercising such discretion vested in the court. I, therefore, do not find any necessity for giving such direction.
40. Under point (xx) of the Gujarat High Court's decision considered above, it is further observed that if the company has power to reduce its share capital as provided in its articles of association it is implicit therein that it can reduce both the ordinary share capital well as the preference share capital unless specific provision to the contrary is made. Under point (xxv), it is observed that the essential requirement of section 393(1)(a) was that the creditors and members who were to assemble in the meeting should have advance information of the proposed scheme of compromise and arrangement and its effect on their interest as members and creditors. If the whole of the proposed scheme was annexed to the notice, anyone having a bare perusal of the scheme would be able to find out what was intended to be done by the scheme of compromise and arrangement and what would be its effect on his interest as creditor or member of the company. In the case before us these requirements have been specifically complied with, and in that view of the matter, therefore, the decision of the Gujarat High Court in Maneckchowk and Ahmedabad .'s case [1970] 40 Comp Cas 819 renders positive assistance to the case of the petitioners rather than invalidating the scheme on any account.
41. In the case of Asian Investments Ltd., In re [1992] 73 Comp Cas 517, the Madras High Court held that the object of asking for confirmation by the court of reduction of share capital was to safeguard the interest of the creditors. Where the resolution approving the scheme of amalgamation was unanimous, the provisions of section 100 were not attracted. It was also held that where a scheme of amalgamation of companies contemplates the transfer of the entirety of the assets and liabilities of the transferor company to the transferee company, the assets of the transferor company on amalgamation stand transferred to and vested in the transferee company and it could not be treated as assets of the transferor company, having been released and in such a case the provisions of section 100 of the Act, prescribing that a special resolution should be passed before reduction of the company's share capital would not apply.
42. In the case of HCL Ltd. and HCL Hewlett-Packard Ltd., In re [1994] 80 Comp Cas 228, the Delhi High Court held that the provisions of the scheme of arrangement clearly showed that there was no diminution of liability in respect of unpaid share capital or payment to any shareholders of any paid-up share capital so as to attract the procedure envisaged under section 101(2) of the Act. In the existing company, the Delhi High Court observed that the shares were fully paid up and the proposal was one whereby some divisions of existing company were being spun off to the new company. There was really no reduction in capital as the bifurcation involved both assets and liabilities, to go with the divisions which could discharge these liabilities to creditors.
43. The proposed amalgamation of the transferor company with the transferee company and the arrangement between the transferee company and its members, in the instant case, on applying the ratio laid down in the decisions of several High Courts, as discussed above, coupled with our own observation, gives us a good reason to believe that there is no constraint on sanctioning the scheme of amalgamation of the transferor company with the transferee company and the arrangement between the transferee company and its members. The objections raised by the Registrar of Companies on behalf of the Central Government, therefore, do not come in our way, as elaborately discussed above, in sanctioning the scheme.
44. We have already seen above that the chairman appointed by the order of the court reported that the shareholders of the transferee company and transferor company have unanimously approved not only the scheme of amalgamation of the transferor company with the transferee company, but also the scheme of arrangement between the transferee company and its members. We have also seen that the official liquidator has also reported that the affairs of the transferee company had not prima facie been conducted in a manner prejudicial to the interests of its members or to public interest.
45. The objections raised by the Registrar of Companies have been considered in this order and it is finally held after hearing the rival parties on the objections taken by the Central Government that there is no harm in sanctioning and confirming the scheme of amalgamation and arrangement as proposed.
46. Hence the scheme of amalgamation as approved unanimously by the shareholders of the transferor and transferee companies and also the arrangement between the transferee company and its members, including capital restructuring by way of reduction and consolidation of share capital of the transferee company be and is hereby sanctioned and confirmed so as to be binding on all the members, secured and unsecured creditors and the employees of both the companies.
47. The transferor company is directed to be dissolved without being wound up.
48. A copy of the scheme of amalgamation and arrangement shall be attached to this order.
49. The parties to the scheme or any other person interested shall be at liberty to approach this court for any direction that may be required for carrying out the scheme of amalgamation and arrangement.
50. It is also hereby ordered that under section 394 of the Act, both the transferor and transferee companies shall, within 30 days after the date of the order, cause a certified copy of this order to be delivered to the Registrar of Companies, Andhra Pradesh, Hyderabad, and on such certified copy being delivered, the Registrar of Companies shall take all necessary consequential action in respect of the transferor and transferee companies. The petitions are accordingly ordered.