Deepak Verma, J.
1. The petitioner-company has filed this petition under Section 391 read with Section 394 of the Companies Act, 1956 (hereinafter referred to as 'the Act'), for sanctioning the scheme of amalgamation with another company known as Nirma Ltd. The petitioner-company shall hereinafter be referred to as N. C. L., i.e., the transferor-company and Nirma Ltd., shall be referred to as N. L., i.e., the transferee-company. In the said petition, prayer has also been made for fixing date, time and place for calling the meetings of shareholders and creditors of N. C. L., the transferor-company, and to appoint a chairman for calling such meetings.
2. This court passed an order on February 3, 1995, appointing Madam Vandana Kasrekar, advocate, as chairperson to convene the meetings as mentioned above.
3. Accordingly, Madam Vandana Kasrekar acting as chairman, convened meetings of shareholders, secured and unsecured creditors of the company on March 11, 1995, at its registered office. As required under the provisions of the Companies Act and the Companies (Court) Rules, the notice convening the said meetings were duly published in Free Press, Indore, on February 16, 1995, Dainik Bhaskar, Indore, dated February 16, 1995, Gujarat Samachar, Ahmedabad, dated February 16, 1995, Indian Express, dated February 15, 1995, and Economic Times, dated February 16, 1995.
4. In the meetings convened under the chairmanship of Madam Vandana Kasrekar of shareholders, secured and unsecured creditors, they have unanimously resolved and approved the scheme of amalgamation. Thereafter, the chairman submitted her report to this court on March 13, 1995.
5. After submission of the report by the chairman, a final petition confirming the scheme of amalgamation was filed by the transferor-company (NCL) Nilnita Chemicals Limited, in this court on March 13, 1995. The said petition seeking sanction of the scheme of amalgamation came up for consideration before this court on March 24, 1995. On the said date, notices were directed to be issued to the Central Government and to the official liquidator. On the same date, further direction was given that notices be published again in Free Press (Indore Edition), Gujarat Samachar (Ahmedabad Edition), Indian Express (Ahmedabad Edition), Economic Times (Ahmedabad Edition) in English and in Dainik Bhaskar (Indore Edition) in Hindi. After service of the notices on the Central Government and the official liquidator, they appeared in this court.
6. The Regional Director, through the Registrar of Companies, Madhya Pradesh, submitted his report to this hon'ble court, raising no objection to the said scheme of amalgamation with a prayer that the matter be disposed of at the discretion of this court.
7. The official liquidator submitted two sets of detailed objections opposing the prayer of the petitioner-company, for sanctioning the scheme of amalgamation. The said objections shall he dealt with in greater detail at a later stage.
8. The petitioner-company (transferor-company) was incorporated on September 4, 1985, as a limited company in the office of the Registrar of Companies of Maharashtra. Subsequently, the registered office of the company was shifted to Madhya Pradesh at 413, Sector III, Bagdoon, Pithampur (District Dhar, M. P.). The share capital of the petitioner-company as on March 31, 1994, was five lakhs equity shares of Rs. 10 each, valued at Rs. 50,00,000. After March 31, 1994, the petitioner-company raised its authorised capital and issued bonus shares of Rs. 6,00,00,000. The authorised, issued, subscribed and paid-up capital of the petitioner-company stood as under on the date of filing of the petition : 65,00,000 equity shares of Rs. 10 each, valued at Rs. 6,50,00,000.
9. The object for which the petitioner-company was incorporated are set out in the memorandum and Articles of association of the petitioner-company. Copy of the same has been filed as annexure A. The main objects are to manufacture, produce, refine, process, formulate, buy, sell, trade, export, or otherwise deal in all types of heavy and light chemicals, chemical elements and compounds, including without limiting the generality of the foregoing, laboratory and scientific chemicals of any nature used or capable of being used in the pharmaceutical industry, agricultural chemicals, fertilizers, petro-chemicals, industrial chemicals or any mixtures, derivatives and compounds thereof. The objects incidental or ancillary to the attainment of main objects are to amalgamate with any other company having objects altogether or in part similar to those of this company.
10. The petitioner, the transferor-company, is a listed public limited company. The transferee-company, i.e., Nirma Limited, is also a listed public limited company, which was established in the year, 1980. The transferor and transferee-company, both are engaged in identical business. They are manufacturing heavy and light chemicals, chemical detergents, detergent powder, detergent cakes, soaps and other such products of like nature. Both companies being in the same line of business, the directors thought it fit to amalgamate them for the purposes of, inter alia, achieving better and more beneficial results for both.
11. According to the petitioner, the amalgamation will enable pooling of resources of both Nirma Limited and Nilnita Chemicals Limited. The amalgamating company will have stronger resilience to withstand competition that may arise in the wake of liberalisation of Government policy and foreign investment under which entry of multinational corporations in related business has been permitted, There shall also be better rationalisation of the manufacturing and marketing activities. Many other reasons have been assigned in this petition so as to satisfy this court that approval of the scheme of amalgamation shall be highly beneficial to the shareholders and all other concerned parties of the transferor-company. It is, in fact, not necessary to go into further details with regard to the reasons assigned by the transferor-company, N. C. L.
12. On account of the aforesaid facts and circumstances, the board of directors of the petitioner company resolved that subject to such directions and sanction of shareholders and creditors, and subject to sanction by the court, the scheme of amalgamation be made between the petitioner-company and the transferee-company. The scheme of amalgamation has been filed and is marked as annexure C. The basic salient features of the said scheme are mentioned in short, as under :
(i) With effect from April 1, 1994, the entire undertaking, immovable and movable assets of the petitioner-company shall stand vested in the transferee-company ;
(ii) All debts, liabilities, dues and obligations of the petitioner-company shall be deemed to be transferred to the transferee-company ;
(iii) Any suit, appeal or other proceedings against the petitioner-company shall not abate, or, discontinue and shall continue against the transferee-company ;
(iv) The shareholders of the petitioner transferor-company shall get gainfully paid-up equity share of Rs. 10 each for the share of Rs. 10 of the value of transferee, i.e., to say share exchange ratio would be 1 : 1.
(v) After April 1, 1994, the petitioner-company shall be deemed to be carrying on business for and on behalf of the transferee-company ;
(vi) The petitioner-company shall be dissolved, but without any order of winding-up.
13. On the aforesaid grounds, the prayer has been made, that the scheme of amalgamation be sanctioned and all consequential and supplemental orders be made as may be deemed fit by this court.
14. It has already been mentioned that the Central Government has not raised any objections against sanctioning of the scheme of amalgamation. The official liquidator has filed two sets of objections. His contention is that T. N. Unni, chartered accountant, was appointed under order of this court, to scrutinise the books of account and papers of the petitioner-company. The chartered accountant has submitted his report and in the same the share exchange ratio has been dealt with. The exchange ratio has not been criticised on the ground that the same shall not be beneficial to the shareholders of the petitioner-company, but has been criticised mainly on the ground that the shareholders of the petitioner-company shall be greatly benefited by getting 1:1 share, as the market share value of Nirma Limited is much higher than that of the petitioner-company. Allotment of bonus shares after the date of appointment, i.e., April 1, 1994, has been criticised.
15. There is also objection with regard to the manufacturing and selling arrangement entered into between the petitioner-company with S. K. Patel family trust. The relevant portion of the objection is reproduced herein-below :
'What thus reasonably appears is that NCL is excellently dressed up in the last few years for accumulating profits, declaration of bonus shares and for the working of a fabulous and unrealistic share exchange ratio, through the scheme of amalgamation by those having controlling interest in NL and ALPA, which ultimately will be detrimental to at least those members of NL which are part of the general public.'
16. The third objection is with regard to borrowings made by the petitioner-company. In this regard, the objection is that on account of borrowing made by petitioner-company from Kalupur Commercial Co-operative Bank Limited, the arrangement appears to have created great risk for it. It has also been mentioned, that with intention to avoid and evade the provisions of Section 370 of the Companies Act, this arrangement is being done.
17. The other objection is with regard to the petitioner's unit being registered as a small scale unit and its enjoyment of various benefits, reliefs and concessions, etc. It has also been submitted that the official liquidator had approached the Development Commissioner of Small Scale Industries, New Delhi, as well as the Small Scale Service Institute, Indore, for their views on the matter. They have not raised any objections against sanctioning of the scheme of amalgamation, as proposed by the petitioner-company.
18. Lastly, it has been submitted by the official liquidator that it appears that the affairs of the transferor-company have been managed in a manner highly prejudicial and against public interest, therefore, the company is not entitled to be dissolved without winding-up.
19. The petitioner-company has submitted its reply, meeting each and every objection of the official liquidator. The official liquidator, thereafter, filed a reply to the said rejoinder, submitted by the petitioner-company. Both have reiterated what has already been mentioned above.
20. The first and foremost question that arises for consideration of this court is what objections can legally be taken by the official liquidator and can be permitted to be put into service, while sanctioning a scheme of amalgamation.
21. I have heard learned senior counsel Shri G. M. Chaphekar, and the official liquidator at length, and have perused the record.
22. Shri Chaphekar, submitted that the role of the official liquidator is limited to the extent as contemplated under the second proviso to Section 394 of the Act. His contention is that, apart from this provision, under the Act or the Rules, the official liquidator cannot be permitted to take each and every sort of objections against sanction of the scheme of amalgamation. The relevant second proviso of Section 394{1) of the Companies Act is reproduced hereinbelow :
'394. Provisions for facilitating reconstruction and amalgamation of companies.- . . .
(2) Provided further that no order for the dissolution of any transferor-company under Clause (iv) shall be made by the court unless the official liquidator has, on scrutiny of the books and papers of the company, made a report to the court that the affairs of the company have not been conducted in a manner prejudicial to the interests of its members or to public interest.'
23. His submission is that in view of the aforesaid proviso, it leaves no doubt that objections can be within the proviso and not beyond it.
24. Shri Chaphekar further submitted that the purpose of inviting objection from the official liquidator is that the directors, or other persons concerned with the affairs of the transferor-company may not be let off, in case they had conducted their business prejudicial to the interest of the transferor-company. His contention is that the official liquidator has not been able to point out a single act of the directors or any officers concerned with the affairs of the petitioner transferor-company that they had conducted business prejudicial to the interest of the company. Thus, his thrust of argument is that objections should not be taken for the sake of taking objections, unless the same can be substantiated by some valid material. In this case, according to him, there is no impediment to sanction the scheme of amalgamation. After consideration of all aspects of the matter, I agree with the contentions of Shri Chaphekar and find that there is no force in this objection.
25. Dealing with other objections of the official liquidator, Shri Chaphekar, submitted that borrowings made by the petitioner-company were in its usual course of business and the creditors' interest has been sufficiently safeguarded by inserting a Clause in the scheme itself. It has also been submitted that after the sanction, all liabilities of the trans feror-company shall be of the transferee-company. Thus, this cannot be a cause for anxiety. In the considered opinion of this court, the interests of the petitioner's creditors have sufficiently been safeguarded, therefore, the objection in this regard is hereby overruled.
26. The objection with regard to the share exchange ratio also merits rejection as chartered accountants have worked out that 1 : 1 share ratio would he just proper and beneficial to the interest of the shareholders of the petitioner-company. Chartered accountants are experts on the subject and there is no basis to ignore their opinion, that too, when there is no male-rial before me to do so. It is worth mentioning thai the official liquidator has submitted that it is no doubt true that this exchange ratio would be more beneficial to the shareholders of the transferor-company. Thus, on his own showing, it being beneficial, there does not appear to be any reason to reject the petition on this ground. Thus, this objection is also rejected.
27. The official liquidator's objection that the petitioner-company has been registered as a small scale unit and enjoys several benefits, including tax benefits, has no merit or force. The official liquidator had written to the concerned departments with regard to the exemptions granted to it but in turn they had replied that the same were rightly granted to the petitioner. The matter of grant of exemption or registration of petitioner's unit as small scale unit, being between the State and the petitioner-company, the official liquidator has no role to play, especially in view of the stand taken by the departments in this regard. This ground, being devoid of any merit or substance is hereby rejected.
28. The other objection that the petitioner-company has entered into a manufacturing and selling agreement has no force and merit. In the usual course of business, the petitioner-company is entitled and at liberty to see how best to achieve its business goal. In the considered opinion of this court, there is nothing illegal or unnatural in entering into such agreement. Thus, this objection is overruled and rejected.
29. The last objection is that affairs of the transferor-company, N. C. L., have been managed in a highly prejudicial manner and against public interest, but the official liquidator has failed to substantiate this ground of attack by any further material. There is nothing on record to show that the petitioner-company had conducted its business, or any other act in such a manner which could be said to be prejudicial to the interest of the members or shareholders of the petitioner-company. Thus, this objection being devoid of any merit or substance is hereby rejected.
30. Now, I shall deal with the law as enunciated by various High Courts and the Supreme Court while dealing with similar petitions and deciding objections of creditors, directors, shareholders or of the official liquidator. The first case relied upon by learned counsel for the petitioner is reported as Piramal Spinning and Weaving Mills Ltd., In re [1980] 50 Comp Cas 514 (Bom). In the said case, there was a dispute with regard to the share exchange ratio. The learned single judge has held that valuation of shares is a technical matter, which requires considerable skill and expertise. If the same has been worked out and arrived at by experts then the same should be accepted, more so if the same has the approval of the shareholders.
31. As has been discussed above, the share exchange ratio has been accepted and approved by all the shareholders of both the companies. The scheme of amalgamation has also been approved by the Gujarat High Court on May 3, 1995, pursuant to the petition filed by the transferee-company (N. L.). Thus, there does not appear to be any legal impediment in granting sanction for amalgamation of the scheme.
32. The other case referred to is reported as Shankaranarayana Hotels Pvt. Ltd. v. Official Liquidator, Government of Karnataka [1992] 74 Comp Cas 290 (Kar). In the said judgment, it has been held as under (page 300) : 'The principles governing the amalgamation/compromises and merger of the transferor and transferee-companies are well settled. Amalgamation should not only be beneficial to the companies, but should also be in the interest of creditors and members of both the transferor and transferee-companies and should be in the public interest.
33. The court, in exercising its discretion under Sections 391 and 394 of the Act, has to see that the scheme as a whole, having regard to the general conditions and background and object of the scheme, is reasonable and fair. If the court finds that the scheme of amalgamation is beneficial to the members of both the companies and the affairs of the company which is going to be dissolved, the transferor-company, have not been conducted in a manner prejudicial to the interests of its members or to public interest, it is not for the court to launch any investigation upon the commercial merits or demerits of the scheme. The court shall not dwell upon or interfere with the collective wisdom of the shareholders of the company.'
34. The ratio of the aforesaid case is that the very object of calling for the report of the official liquidator is to satisfy the court that the interests of shareholders and public interest are not prejudicially affected by the amalgamation. In fact, I find that the scheme shall be greatly beneficial to the interest of shareholders and objections taken by the official liquidator are uncalled for and beyond the scope of the powers conferred on him, under the second proviso to Section 394(1) of the Companies Act.
35. The Division Bench of the High Court of Madras has held in the case of Sugarcane Growers and Sakthi Sugars Shareholders' Association v. Sakthi Sugars Ltd. [1998] 93 Comp Cas 646 ; 6 SCL 144, that the report of the official liquidator is required only for the purpose of passing an order of winding up of the company but it is not required when an order sanctioning a scheme of amalgamation is to be passed.
36. In the case in hand, the scheme of amalgamation is to be sanctioned. The effect of the same would be that there would be dissolution of the petitioner-company without there being any order of winding up of the transferor-company, as contemplated under Section 394(1)(iv) of the Act. Thus, I find that the scheme of amalgamation shall be greatly beneficial to the shareholders of the petitioner-company and the same is not against public interest.
37. In Marybong and Kyel Tea Estate Ltd., In re [1977] 47 Comp Cas 802, the Calcutta High Court has held that Section 394(1)(iv) of the Act gives specific power to the court to pass an order of dissolution, at the time of sanctioning a scheme of amalgamation of the transferor-company, without passing any order of winding-up. The dissolution of a company can be ordered under Section 394(1)(iv) of the Act even in cases where the company is a going concern, along with the other type of company which are in different stages of winding-up. In the said judgment it has further been held that the second proviso to Section 394(1) contemplates the stage after sanctioning, but, before an order of dissolution under Section 394(1)(iv) of the Act, where the transferor-company is a going concern, in respect of which no winding-up petition has been presented, or, there is no voluntary winding-up pending. This construction seems to be a reasonable and harmonious construction without doing any violence to the language of the scheme, object or purpose of the Act under the provisions of Section 394(1)(iv). It has also been held that under the second proviso, the report of the official liquidator is not a condition precedent, because no order of winding up is to be passed, in the case of the company which is being amalgamated with another company. Accordingly, the scheme as proposed, was sanctioned and also an order for dissolution was allowed, as prayed for by the petitioner.
38. As has been discussed above, in the present case, the official liquidator has submitted his reports, which have already been dealt with in greater detail in the preceding paras. Taking an over all view of the matter, I find myself in total agreement with the learned single judge of the Calcutta High Court.
39. 1 also find support from a judgment of this court in Kriti Plastics Pvt. Ltd., In re [1993] 78 Comp Cas 138 (MP). In the said judgment, it has been held that the official liquidator acts as an agent of the court to satisfy itself that the affairs of the company to be dissolved, had not been conducted in a manner prejudicial to the interest of its members and public interest. Therefore, the court has to ascertain that the scheme of amalgamation is sanctioned only after the court has the other side of the picture of it, and while sanctioning the scheme of amalgamation, the report of the official liquidator should be taken into consideration so as to see that by sanctioning the scheme, there is no avoidance of tax liability, as also payment of stamp duty. In this matter also, with certain directions, the scheme of amalgamation has been passed.
40. Recently, the apex court had occasion to deal with Section 394 of the Act in the matter of Hindustan Lever Employees' Union v. Hindustan Lever Ltd. [1995] 83 Comp Cas 30 ; AIR 1995 SC 470. It has been held in the said case, that in a case of amalgamation of companies more than 95 per cent, of the shareholders who were the best judge of their interest and are better conversant with market trend agreed to the valuation determined, it could not be interfered with by the courts as, certainly, it is not the part of the judicial process to examine enterpreneurial activities to ferret out flaws. The court is least equipped for such oversights, nor, indeed is it a function of the judges in our Constitutional scheme. It cannot be said that the internal management, business activity, or, institutional operation of public bodies, can be subjected to inspection by the court. To do so is incompetent and improper and, therefore, out of bounds. Nevertheless, the broad parameters of fairness in administration, bona fides in action and the fundamental rules of reasonable management of public business, if breached will become justiciable. It has also been held by the apex court in the aforesaid judgment, that in sanctioning a scheme of merger, it is not necessary to ascertain with mathematical accuracy if the determination satisfies arithmetical test or not. A company court does not exercise an appellate jurisdiction. It exercises a jurisdiction founded on fairness. The court's obligation is to satisfy that the valuation was in accordance with law and the same was carried out by an independent body. It has further been held that internal management, business activity, or, institutional operation of public bodies cannot be subjected to inspection by the courts.
41. In yet another judgment, the Supreme Court has held in the matter of Miheer H. Mafatlal v. Mafatlal Industries Ltd. [1996] 87 Comp Cas 792 as under (headnote) :
'On a conjoint reading of the relevant provisions of Sections 391 and 393 of the Companies Act, it becomes clear that the company court which is called upon to sanction such a scheme has not merely to go by the ipse dixit of the majority of the shareholders or creditors or their respective classes who might have voted in favour of the scheme by a requisite majority but has to consider the pros and cons of the scheme with a view to finding out whether the scheme is fair, just and reasonable and is not contrary to any provisions of law and does not violate any public policy.
No court of law would countenance a scheme of compromise or arrangement arrived at between the parties and which might be supported by the requisite majority if the court finds that it is an unconscionable or an illegal scheme or is otherwise unfair or unjust to the class of shareholders or creditors for whom it is meant. Consequently, it cannot be said that the company court before whom an application is moved for sanctioning such a scheme which might have got the requisite majority support of the creditors or members or any class of them for whom the scheme is mooted by the concerned company must automatically put its seal of approval on such a scheme. It is trite to say that once the scheme gets sanctioned by the court it would bind even the dissenting minority shareholders or creditors. Therefore, the fairness or the scheme qua them also has to be kept in view by the company court while putting its seal of approval on the concerned scheme placed for its sanction.
The court will not act as a court of appeal and sit in judgment over the informed view of the concerned parties to the compromise as the same would be in the realm of corporate and commercial wisdom of the concerned parties. The court has neither the expertise nor the jurisdiction to delve deep into the commercial wisdom exercised by the creditors and members of the company who have ratified the scheme by the requisite majority. Consequently the company court's jurisdiction to that extent is peripheral and supervisory and not appellate. The court cannot, therefore, undertake the exercise of scrutinising the scheme placed for its sanction with a view to finding out whether a better scheme could have been adopted by the parties.
The sanctioning court has to see to it that all the requisite statutory procedure for supporting such a scheme has been complied with and that the requisite meetings as contemplated by Section 391(1)(a) have been held ; that the scheme put up for sanction of the court is backed up by the requisite majority vote as required by Section 391, Sub-section (2); that the concerned meetings of the creditors or members or any class of them had the relevant material to enable the voters to arrive at an informed decision for approving the scheme in question ; that the majority decision of the concerned class of voters is just and fair to the class as a whole so as to legitimately bind even the dissenting members of that class ; that all necessary material indicated by Section 393(1)(a) is placed before the voters at the concerned meetings as contemplated by Section 391, Sub-section (1); that all the requisite material contemplated by the proviso to subsection (2) of Section 391 of the Act is placed before the court by the concerned applicant seeking sanction for such a scheme and the court gets satisfied about the same ; that the proposed scheme of compromise and arrangement is not found to be violative of any provision of law and is not contrary to public policy. For ascertaining the real purpose underlying the scheme with a view to being satisfied on this aspect, the court, if necessary can pierce the veil of apparent corporate purpose underlying the scheme and can judiciously X-ray the same. The company court has also to satisfy itself that the members or class of members or creditors or class of creditors, as the case may be, were acting bona fide and in good faith and were not coercing the minority in order to promote any interest adverse to that of the latter comprising the same class whom they purported to represent. The scheme as a whole must also be found to be just, fair and reasonable from the point of view of prudent men of business taking a commercial decision beneficial to the class represented by them for whom the scheme is meant.
Once the aforesaid broad parameters about the requirements of a scheme for getting sanction of the court are found to have been met, the court will have no further jurisdiction to sit in appeal over the commercial wisdom of the majority of the class of persons who with their eyes open have given their approval to the scheme even if in the view of the court there would be a better scheme for the company and its members or creditors for whom the scheme is framed.'
42. The ratio of these judgments fully satisfies the case in hand. I find that there is no impediment in sanctioning the scheme.
43. On the other hand, the official liquidator has relied on a judgment reported in Webb's Farm Mechanization (P.) Ltd. v. Official Liquidator [1996] 85 Comp Cas 146 [FB] (Kar). In the said judgment, the Full Bench of the Karnataka High Court, has held that while sanctioning a scheme of amalgamation the report of the official liquidator is necessary. There is no dispute with regard to the proposition as propounded by the Full Bench of the Karnataka High Court. In the instant case also, the official liquidator has been called upon to submit his report and the said reports have been dealt with by me in the preceding paras.
44. Thus, on overall consideration of the matter, I am of the considered opinion that the scheme of amalgamation is beneficial to the interest of the shareholders and is not against public interest. The same is hereby sanctioned, subject to the following conditions :
(1) that the approval of the scheme of amalgamation does not in any way dispense with the formality of execution of instrument of conveyance and other documents for effectively vesting of the property and rights of the transferor-company in the transferee-company, and the same should be done strictly in accordance with law ;
(2) If, as a result of the transfer of any assets or share of the transferor-company to the transferee-company any liability of capital gains may arise against any company, or its shareholders or payment of tax which may be leviable under the existing taxation laws, then the concerned authorities shall be free to proceed in the matter of tax, in accordance with law, irrespective of the order of amalgamation.
(3) The present order of amalgamation will not absolve any of the companies or its directors from the liability for breach of any law or control order, which might have been committed before the order of amalgamation.
(4) The aforesaid conditions should form part of the scheme of amalgamation.
45. With the aforesaid conditions, the amalgamation scheme is hereby approved. The necessary effect of sanctioning of the scheme of amalgamation is that the transferor-company stands dissolved but, without there being any order of winding up. The said scheme shall take effect from April 1, 1994. The Registrar of Companies, on receipt of the order do place all documents relating to the said transferor-company and register with him on file kept by him in relation to the transferee-company and the files relating to the said transferee-company be consolidated accordingly.
46. The petition stands allowed, but with no order as to costs.