HIGH COURT OF CALCUTTA
J.K. Agri Genetics Ltd.
Union of India
A.P. O. NO. 249 OF 2010
C.P. NO. 361 OF 2006
SEPTEMBER 10, 2012
Ashim Kumar Banerjee. J.
This appeal would involve Scheme of Arrangement between J.K. Agri Genetics Limited and Florence Alumina Limited, sanction of which was refused by the learned company Judge vide judgment and order dated May 20, 2010 in C.P. No.361 of 2006, that gave rise to the present appeal. The application was opposed by two shareholders namely, Shri Krishnagopal Motilal Chandak, the respondent no.3 and Ramesh Kumar R. Fofalia being respondent no.4. They represented about two per cent of the shareholding in J.K. Agri Genetics. They however claimed, they did hold proxies, that were wrongfully rejected at the meeting of the shareholders. Even if the proxies were taken into account that would not have any remarkable increase in the shareholding pattern as we find from the record. As per the Scheme of Arrangement J.K. Genetics and Florence Alumina agreed to have re-alignment of business operation through demerger. The transferor company was listed at the Bombay Stock Exchange as we find from the record. J.K. Genetics was incorporated on May 25, 1993 whereas Florence Alumina was set up in March 2000. The transferor company claimed, they wanted to create focussed entity on the core business of “Seed Undertaking” and proposed re-alignment of business operation by transferring the “Seed Undertaking” of J.K. Genetics to Florence Alumina in exchange of share premium. They claimed that it would have a larger interest of both the companies and their shareholders. As per the scheme, “Seed Undertaking” was defined as all assets pertaining to research and development production marketing of hybrid seeds. The meeting passed the resolution in favour of the scheme by overwhelming majority save and except objection raised from shareholders having insignificant holding. The petition for sanction came up after advertisement. Central Government did not raise any objection to the said scheme being sanctioned. Chandak and R. Fofalia however objected to the said scheme as according to them, the share of Florence Alumina that was being offered in exchange of transfer of undertaking was grossly undervalued. The Central Government filed affidavit through the Regional Director. They objected to a portion of the scheme as pointed out in the said affidavit. According to them, the scheme would attract appropriate registration fee and stamp duty. It would also require compliance of Sections 16 and 94 of the Companies Act 1956. The shareholding could only be increased as per the appropriate provisions of law and not as suggested in the scheme and the Clause pertaining thereto should be deleted. They stated, unless there was appropriate increase of authorized capital in Florence Alumina it would not be in a position to allot appropriate shares to J.K. Agri Genetics Ltd and its shareholders in respect of the “Seed Undertaking” that was being transferred to it. The Central Government also objected to the free reserve as also change of name of the company after its demerger. The Central Government also objected, unless there was appropriate increase of subscribed capital as per the provisions of Section 81 of the said Act of 1946 and such increase was approved by a special resolution by the shareholders the scheme could not be implemented.
2. Chandak also filed affidavit. According to Chandak, the re-structure by way of demerger would have achieved the growth of the company. It would affect the interest of the minority shareholders of J.K. Genetics and would make them hopeless insignificant minority. The sole intention was to undervalue the shares. He also elaborated how the promoters of J.K. would gain control of the shareholding having a controlling block of shares to the exclusion of the minority. He also objected the conversion of redeemable preference shares and the non-convertible bonds, the way it was suggested in the scheme. Chandak also objected to the manner of holding of the meeting of the shareholders including objection raised with regard to rejection of proxies. He claimed to have filed affidavit on his behalf as well as other ninety nine shareholders.
3. R. Fofalia also filed affidavit as would appear from Page 618-645 of the paper book (Volume-III). He also raised similar objections like Chandak. He elaborated how illegalities were committed in holding of the meeting only to support the interest of the controlling block of shares.
4. The company filed affidavit in reply dealing with the objections raised by respondent no.2. Separate affidavit was filed dealing with objection of respondent no.3 and respondent no.4 respectively. Altogether three affidavits were filed in reply.
Judgment and Order Impugned
5. Upon hearing the rival contentions the learned single Judge dismissed the application. The basis of the judgment as we find on perusal was on two counts –
(i) The petitioners did not comply with the provisions of Section 81(1A) of the said Act of 1956.
(ii) The learned Judge dealt with the issue of irregularity committed in the meeting and held that even if sixteen proxies, that were rejected, were validly cast and forty one ballots relating to the missing attendance slips were credited to the lot of objector, he could not have defeated the scheme as it would be below the 3/4th majority present and voting in number and value. Thus, the objection on that count was rejected.
6. On merits of the scheme, His Lordship observed that share exchange ratio could not be faulted as no better ratio was produced. The method adopted in arriving at such ratio was not under challenge. His Lordship also held in favour of the applicant on the question of retention of liability holding it as commercial wisdom of the management. His Lordship however termed the scheme as unfair and declined to sanction the same principally on the ground that the scheme would increase the promoters’ share that would not benefit the other shareholders except the promoters. According to His Lordship, “the conversion contemplated will benefit the promoters and none else”. His Lordship also held, if bonds were to be redeemed in instalments the present discounted value ought to have been considered. According to His Lordship, no prudent businessman would suggest such scheme without considering the discounting aspect. Dealing with the “no objection” received from SEBI, His Lordship observed, the said approval was subject to certain relaxation granted by SEBI. Coming back to the issue of conversion, His Lordship observed, the reason for conversion was insufficient in cash flow, however, that was far from truth.
7. His Lordship relied on the decision in the case of Miheer H. Mafatlal v. Mafatlal Industries Ltd.  87 Comp. Cas. 792/10 SCL 70 (SC) and Bedrock Ltd., In re  101 Comp. Cas. 343/ 17 SCL 385 (Mum.) to support her view that the Court was competent to judiciously x-ray the same and would not function as a rubber stamp or post office. His Lordship also relied upon the English decision in the case of Sussex Brick Co. Ltd., In re  30 Comp. Cas. 536 (CD) to support her view that the conversion was intended to promote the interest on JKIL being a separate class and a meeting of such class ought to have been held. His Lordship rejected the Scheme of Arrangement and Demerger. Hence, this appeal.
8. Mr. Sudipto Sarkar, learned senior counsel appearing for the appellant contended, Section 81(1A) would not apply in the given facts and circumstances as it would be superfluous. Once the creditors sanctioned the scheme with 3/4th majority the requirement of Section 81(1A) would be superfluous as it would require support of a special resolution to offer further shares to the persons named under Sub-section 1 of Section 81 and when no resolution was passed if the members cast vote by show of hands or ballot in favour of the proposal exceed the vote cast against and the Central Government was satisfied on the application of the Board of Directors that the proposal was beneficial to the company. Section 189 would provide that a special resolution would require 3/4th majority of the members present and voted. Section 189(2)(C) would prescribe a special resolution to have votes in favour to the extent of not less than three times the number of the votes cast against the resolution by the members so present and voting. He referred to the Bombay Stock Exchange “no objection” as well as the approval of SEBI. According to Mr. Sarkar, neither the ratio decided in the case of Miheer H. Mafatlal (supra) nor Bedrock Ltd. (supra) would apply in the instant case as erroneously relied on by His Lordship.
9. Resuming argument on behalf of the appellant on the next day, Ms. Mousumi Bhattacharya took us to the decision in the case of Miheer H. Mafatlal (supra) particularly, paragraph 29 and 40 to contend, the commercial wisdom of the parties’ concerned in corporate field would be of paramount consideration of the Court. The Court did not have expertise to examine the commercial wisdom. It would act as an umpire in a game of cricket and not to critically examine the acts of the parties.
10. Taking over from Ms. Mousumi Bhattacharya, Mr. Debangsu Basak, learned counsel also appearing for the appellant wound up the argument by referring it to paragraphs 6.4, 6.12 and 6.13 of the judgment to show apparent inconsistency. Mr. Basak lastly contended that the commercial wisdom of the shareholders would reflect from the voting pattern that would overwhelmingly approve the scheme. Hence, the learned Judge was not correct to decline sanction on the pretext that it would not help the minority shareholders or that the scheme was to benefit only the promoters and none else.
11. Per contra, Mr. Ranjan Deb, learned senior counsel supported the judgment by contending that the learned Judge was right in holding that the scheme was unfair to the general body of the shareholders. He made critical comments on the holding of the shareholders’ meeting. He contended, the entire process was vitiated by illegality and unfair dealings that would only benefit the promoters and promoters only. He lastly questioned the validity of the said scheme that would propose demerger of the “Seed Undertaking” from the transferor company to a company which was nothing but a paper company on the day when it was picked up by the promoter to achieve their purpose.
12. Elaborating his argument, Mr. Deb took us to page 136 of the paper book to show that the public holding in the transferor company would get reduced if scheme was approved. As per the shareholding at page 136 the public shareholding was 25.74% that would get reduced to 13.37%. Hence, the public holding by itself was sufficient to block the special resolution that would get reduced in case of demerger being sanctioned. He contended, the transferor company was a paper company having an insignificant capital. It did not have any business at all. The promoters acquired the shareholding and then increased it to fifteen lacs and, by such process, it became a wholly owned subsidiary of the promoters group having 100% holding. No plausible cause was assigned to have this demerger. He also contended that in 2003 the transferor company got the “Seed Undertaking” from another company through a scheme of arrangement that would obligate the transferor company to pay off the preference bonds by redeeming the same in phases. Such liability would continue till the date of proposal of the subsequent demerger. However, by the proposed demerger the transferee company would have the “Seed Undertaking” without liability of the transferor company to redeem the preference bonds. Such process was had without any reference being made to the Company Court that sanctioned the 2003 scheme. Hence, it was illegal and would violate the terms of the sanction granted earlier. Mr. Deb demonstrated that its shareholding along with the proxies, he held on the date of the meeting, would constitute 13.41% including personal holding for 7.2%. His personal holding to the extent of 7.2% would get reduced to insignificant minority to the extent of 3.75% in the transferor company and 2.73% in the transferee company.
13. Mr. Deb was critical about the holding of the meeting. He referred to the minutes of the meeting prepared by the Court appointed Chairman who recorded the objection raised by Chandak in the meeting. However, when their records were produced the ballot papers by which Chandak exercised his vote could not be found. In the supplementary affidavit the company contended that Chandak was busy to take instruction from someone on mobile and abruptly left the meeting without casting his vote. According to Mr. Deb, such statement was blatantly incorrect as would appear from the averment of the company petition before the Company Law Board when they approached the Board under Section111(A), inter alia, praying for an order of restraint from considering the votes cast by Chandak. He contended that all his proxies and ballot papers were removed from the record that would itself prove the illegal conduct of the company only to benefit the promoters and none else. On the issue of conversion, Mr. Deb contended that company had sufficient means to discharge the liability. The plea of conversion was taken only to benefit the promoters as would be appearing from the observations of Ernst & Young, the surveyor who was appointed to give certificate as to the fairness of the fixation of the share exchange ratio. Mr. Deb took us to various pages of the supplementary paper book to show that the company did not act upon the advice of Bombay Stock Exchange or Ernst & Young. Both the organizations categorically pointed out that the scheme was unfair to the general shareholders. He lastly contended, even if the demerger would get the seal of approval of this Court that must be having prospective effect having conversion being effective as on the date of sanction of the scheme or the effective date that could not be made retrospectively.
14. Appearing for Fofalia, Mr. S. Banerjee learned counsel adopted the submissions made by Mr. Deb. In addition, Mr. Banerjee contended that the “Seed Division” was the only effective business that the transferor company would be having. Hence, the demerger would effectively make the transferor company crippled. He would refer to page 895 of the paper book to show that the cash flow which was posed as the main cause of demerger, would be proved wrong. If we refer to page 365 of the paper book we would find, the transferor company was itself sufficient to take load of the liability of the “Seed Undertaking”. In this regard, he would rely upon the English decision in the case of Hellenic & General Trust Ltd., In re  3 ALL ER 382 particularly page 385 and 386 thereof, to support his contention that there should be separate meeting for separate classes that was not held in the instant case.
15. Per contra, Mr. Sudipta Sarkar, learned senior counsel appearing for the appellant while giving reply contended that commercial wisdom of the shareholders must be preserved and the Court should not venture to find out reason behind the decision of the shareholders. On merits, Mr. Sarkar contended that merely because the company was having excess of income over expenditure it would not be sufficient to judge the need of the cash flow by converting the bonds into shares. It would depend upon various commercial aspects that could only be judged by the body of shareholders and the Court must preserve the same considering its sanctity. He contended, Order 41 Rule 33 of the Code of Civil Procedure would not allow the respondent to raise issues that was not the subject matter of the appeal. They would only be entitled to support the judgment and would not be authorized to question any of the findings of the learned Judge without preferring any appeal or a cross-objection against the same.
16. Dealing with the argument on Section 81(1A), Mr. Sarkar contended, no inward cash flow by the process of increase of capital would occur in the instant case. It was nothing but an adjustment of liability against allotment of shares that would not attract the mischief of Section 81(1A). He distinguished the decision in the case of Hellenic & General Trust Ltd. (supra), and also Bedrock Ltd.’s case (supra). He contended, Bedrock Ltd.’s case (supra) was a decision on a meeting of the creditors whereas the present scheme would involve an issue of demerger. He also distinguished the decision in the case of Maneckchowk & Ahmedabad Mfg. Co. Ltd., In re  40 Comp. Cas. 819 (Guj.) relied upon by the leaned Single Judge. He drew our attention to page 858 wherein it was held that Sub-section 1(A) would permit issue of further shares to persons other than the existing ordinary shareholders of the company. The issue of further shares to the persons other than the existing shareholders could not be said to be wholly barred. It would require special resolution. In the instant case, the process of demerger would require allotment of shares to the transferor company that was sanctioned by the shareholders of both the companies through overwhelming majority. Hence, this decision would be of no assistance to the respondents. He lastly contended that preferential allotment of shares to a particular class or a conversion that would otherwise benefit a particular class, could not be said to be impermissible under the corporate law even if such process would ultimately result in reduction of the shareholding percentage of a particular class of shareholding that would, per se, not be termed as illegal.
17. We heard this matter on the above mentioned dates. We are told, Central Government appeared before the learned Judge however, no such noting would appear from the judgment. However, no one appeared before us. Hence, we were compelled to close the hearing in their absence.
18. Miheer H. Mafatlal and Bedrock, Ltd.’s case (supra) if read together, would determine the scope and extent of judicial scrutiny in a case of scheme of arrangement pending for approval of the Court under Section 391. It would say, the Court should act as umpire. It would not be a rubber stamp being a blind folded instrument of putting of seal of approval. It would certainly consider the objections raised by the objectors, to the extent, permissible under the corporate jurisprudence. It would definitely empower the Court to judiciously x-ray the scheme to find out any malicious intent contrary to public policy. To that extent, piercing of corporate veil, if required, is justified. In the instant case, the learned Judge rightly held that commercial wisdom could not be called in question. It is true and to some extent justified, when Mr. Deb would argue unfair dealings at the meeting. It would have been proper if such unpleasant things did not happen at the meeting. The learned Judge rightly held, it did not tilt the balance. The question would still remain, is it a fair scheme? The overwhelming majority of the shareholders approved the same. We are not competent to question such decision. Hence, our scope of enquiry comes in a very narrow campus. The earlier scheme of 2003 would provide discharge of liability through redemption of bonds. If those liabilities would still remain with the transferor as on the date of the sanction by the process and those bonds are transformed into shares in the transferor company the substantial chunk would go to the shareholders of the original transferor company who are common with the promoters of the transferor and transferee company. That would certainly tilt the balance. Can it be avoided? Mr. Banerjee contended, there was sufficient money in the company’s till. Mr. Sarkar would say, the company in their wisdom decided not to use that and plough back the same for the welfare of the company. Such question would certainly not come within our scope for consideration. To that extent, Mr. Sarkar was possibly correct. In the process, if the balance is tilted in favour of the promoter that would be a consequence for which the respondent would have to suffer without a redressal. We are helpless on that count.
19. The only issue which really impressed us was the argument of Mr. Deb on the effective date of conversion. He took us to the reports of the surveyor Ernst and Young appearing at the supplementary paper book where we find that the surveyor also commented that the effective date of conversion should be the date of merger meaning thereby, it would be a post-merger issue and not pre-merger as suggested in the scheme. Mr. Sarkar strenuously contended, that would have no significant relevance. It might be so. He might be correct at the end of the day. We, however, feel, no reasonable plea was placed before us to ignore the opinion of the expert on that count. In our view, the opinion of the surveyor, having the competent expertise, must prevail, particularly, when the company relied on the same at the meeting of the shareholders as contended by Mr. Deb and not confronted by Mr. Sarkar. This is the only small arena where we feel, the scheme would need little re-touch from our end.
This would take us to the last issue of discounting. The learned Judge found, there was some impropriety on this issue. Paragraphs 6.12 and 6.13 being relevant herein are quoted below :
“6.12 By virtue of the conversion the said Bonds and Preference Shares are being redeemed much before the time specified and the present day discounted value ought to have been considered. This has also not been done.
6.13 This is relevant as no prudent businessman while considering the commercial aspect of the Scheme in his wisdom would have proposed a Scheme without considering the discounting aspect. Furthermore, such a Scheme could also not have been approved by a prudent businessman cloaked with commercial wisdom unless such men approving were nothing by “yes-men” of the Transferor Company, Transferee Company and Promoter Company.”
20. Mr. Sarkar, in his usual fairness would concede to the issue. He contended, if this Court would be of the view that a particular date should be fixed for discounting the company should not have any objection. In fact, he placed a chart before us giving different valuation on the discounting on various relevant dates. In our view, the company must adopt the best one that would help the minority shareholders including Chandak and Fofalia. This scheme should stand modified to such extent.
21. The appeal would thus succeed in part and is allowed. The effective date of conversion should be the date being the effective date being the scheme being approved. The effect of conversion must not be “pre-merger”. It should be “post-merger”. We also hold, discounted value must be the best possible one, beneficial to the minority shareholders including Chandak and Fofalia and such date must be fixed by the company accordingly from the chart handed over in Court by Mr. Sarkar. We make it clear for removal of doubts, the conversion must take effect after the merger and not anterior to it.
22. With these modifications the scheme is sanctioned. The application for sanction of the scheme is allowed with consequential reliefs.
23. The appeal is disposed of accordingly without any order as to costs.
Before we Part With
24. After our judgment was made ready, Mr. Sarkar mentioned the matter on August 30, 2012 and requested us to hold it for some time and direct the matter as ‘To Be Mentioned’. On his request we directed the matter as ‘to be mentioned’ on September 5, 2012. On the appointed date when the matter appeared, Mr. Sarkar on instruction informed this Court that the appellant would be agreeable to shift the date of conversion to be made effective on and from April 1, 2010. According to him, that would take care of the principal grievance of the respondent. Mr. Deb however contended, unless and until facts and figures showing the resultant effect of such change was put forward to the Court upon notice to the respondent, he would not be in a position to react the same. Mr. Suddhasatya Banerjee, learned counsel appearing for the respondent No. 4 adopted such submission of Mr. Deb.
25. The main plunk of the argument of Mr. Deb centered around the time for giving effect to the conversion. He referred to the report of the Ernst & Young wherein they opined that conversion should take effect once the scheme was sanctioned. Conversion prior to the merger, was rather discouraged by them. It is true, the concession made by Mr. Sarkar, would dispel the agony. At the same time we are not sure which date would be beneficial to the shareholders, particularly the minorities. Would it be April 1, 2005 as mentioned in the scheme or April 1, 2010 as suggested by Mr. Sarkar? We agree with Mr. Deb, it would require deep scrutiny of a comparative study of the relevant particulars. In absence of the same, we feel it safe to take the date mentioned in the scheme instead of the one as suggested.
Shukla Kabir (Sinha), J. – I agree.