1. This is a petition filed by the Bank of India Ltd. for the sanction of the court to a scheme of arrangement under section 391 of the Companies Act and for the necessary directions under section 394 of that Act.
2. The facts of the case are that the business of the Bank of India Ltd. was nationalised by the Banking Companies (Acquisition and Transfer of Undertakings) Act, being Act V of 1970, with retrospective effect as from 19th July, 1969, after a prior Ordinance and a prior Act attempting to do so had been struck down by the Supreme Court. Under the said Act V of 1970, the assets and liabilities of the Bank of India Ltd. vested in the New Bank of India, and the only right which the old bank, viz., the Bank of India Ltd., acquired was the right to receive Rs. 14.70 crores as compensation. The Bank of India Ltd. received that compensation in the form of 5 1/2% Banks (Acquisition and Transfer) Compensation Bonds, 1999, of the face value of Rs. 14,68,50,000 and a Government promissory note of the face value of Rs. 1,29,200 which, together with certain cash adjustment, made up the said sum of Rs. 14.70 crores. The board of directors of the said bank thereafter considered the various open to it for utilisation of the company's funds, and, after negotiations with the respondent-company, arrived at a mutually agree scheme, the broad outlines of which were announced at the annual general meeting of the Bank of India Ltd. on the 29th of September, 1970. On the 29th of January, 1971, an agreement was entered into between the Bank of India Ltd. (hereinafter refereed to as 'the transferor company') and the Ahmedabad . (hereinafter referred to as 'the transferee company') whereby, subject to the sanction of the court under sections 391 and 394 of the Companies Act and the other requisite formalities being complies with, the transferee company agreed to accept the vesting in it of the transferor company with effect from the 1st April, 1971, on the terms embodies in the said agreement. On the 1st of February, 1971, any my brother Nain passed an order for the holding of a meeting of the shareholders of the transferor company in accordance with the provisions of section 391 of the Companies Act. A meeting of the shareholders of the transferor company was accordingly held on the 18th of March, 1971, for the purpose of considering the proposed scheme, at which there was a discussion and voting thereon, and the result of the poll was announced on the 24th of voting thereon, and the result of the poll was announced on the 24th of March, 1971. The proposed scheme, with certain modifications, was passed by much more than statutory majority, 3,70,194 votes being cast in favour of the resolution, and 36 votes, being the votes of only 3 shareholders, were cast against the same. The report of the said meeting having been filed by the chairman of the transferor company on the 30th of March, 1971, the present petition for the sanction of the said scheme under section 391 and for the requisite directions under section 394 of the Companies Act was thereafter filed on the 12th of April, 1971. It may be mentioned that the transferee company has been made a party-respondent to the present and has appeared through counsel and supported the petition.
3. Under clause 8 of the said scheme, in respect of every four shares in the transferor company, the transferee company is to issue and allot to the members of the transferor company, (i) one 'A' ordinary share of Rs. 25 credited as fully paid and an entitlement to two fractions of 1/10 each of such 'A' ordinary share; (ii) one eight per cent. convertible bond of Rs. 100 credited as fully paid; and (iii) four eight per cent. redeemable bonds of Rs. 116 each credited as fully paid. It may, at this stage, be pointed out that, pursuant to the said scheme, the transferee company would be issuing the said additional shares and bonds and increasing its authorised capital by about Rs. 12 lakhs. Notice having been given to the Central Government has appeared at the hearing of this petition, through counsel, and has opposed the petition. The petition was also opposed by the new Bank of India for whom Mr. A. H. Desai appeared before me, as well as by an individual shareholder named Vijendra Devidas.
4. Of these three parties who opposed the petition, Vijendra Devidas withdrew his opposition to the petition, on Mr. Sorabjee agreeing not to press for costs against him and his opposition, therefore, need not be dealt with by me. As far as the new Bank of India was concerned, its opposition was only founded on the provisions of section 5 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, which provided that the said Act was not to be effective to vest foreign assets in the new bank and nothing in the said Act was to be construed as applying to those assets if, under the law in force in a foreign country, it was not permissible for a banking company owned or controlled by the Government to carry on the business of banking in that country. In the course of the hearing before me, however, the transferor company agree to certain amendments in the scheme and also agreed to a modification in the order sought from this court and, as a result of these amendments and that modification, which were agreed to be incorporated, the new Bank of India also withdrew its opposition to the scheme.
5. That leaves for my consideration only the opposition of the Central Government to the present scheme which is founded on two grounds, viz., (1) that the scheme requires the sanction of the Central Government under the Monopolies and Restrictive Trade Practices Act, 1969; and (2) that an application under sections 391 and 394 of the Companies Act, by the transferee company to the Gujarat High Court within the jurisdiction of which it has its registered office is also necessary. As far as the first point is concerned, the same is based on section 23(1)(a) of the Monopolies and Restrictive trade Practices Act, 1969, read with section 2, (v) and (r) of that Act. That very point was, however, raised before a Division Bench of this honourable court in Appeals Nos. 33 and 34 of 1971, and it was held by that Bench by its unreported judgment dated 17/22nd March, 1971, that utilization of moneys by way of deposit which was not intended to be of any appreciable duration, but was made only pending the finalisation of a scheme, does not evince any intention to carry on investment business, nor could it be said that a bank utilising its monies in that manner was engaged in the provision of service of any kind within the definition of the term 'undertaking' in section 2(v) of the Monopolies and Restrictive Trade Practices Act, 1969. That decision is binding upon me, in so far as that is precisely what the transferor company has been doing in the present case since the time it received compensation under Act V of 1970 to which I have already referred. Mr. Advani no doubt sought to distinguish the facts of the case before the Division Bench from the facts of the case before me, on the ground that, in the case before the Division Bench, the utilisation was for a very short period of 91 days, whereas in the present case it was for a period of 12 or 13 months. In my opinion, however, that makes no difference as far as the ratio of the judgment of the Division Bench is concerned. The ratio is not that what they have laid down applies only if the utilisation is for the precise period of 91 days, but the ratio is that, if the utilisation of moneys was not intended to be of any appreciable duration but was only intended to be pending the finalisation of a scheme, it could not be said that the company was carrying on investment business or rendering any form of service to its members. In my opinion, therefore, the judgment of the Division Bench in Appeals Nos. 33 and 34 of 1971 cannot be distinguished on facts, and the view taken therein is binding upon me. As far as this court is concerned, therefore, the point raised by Mr. Advani under the Monopolies and Restrictive Trade Practices Act. 1969, must be rejected.
6. That leaves for my consideration only one question and that is whether, in a case in which under a scheme the whole or any part of the undertaking property and liabilities of a company are transferred to another company, an application by the transferee company under sections 391 and 394 of the Companies Act to the appropriate court is also necessary. The policy of the law, both in England (Pennington's Company Law, 2nd edition page 439) as well as in this country has been allow companies the greatest freedom in devising schemes to meet their requirements, subject of course to certain statutory safeguards. I must, therefore, proceed to consider the relevant statutory provisions in our country with which I am concerned in the present case. Those provisions are to be founds in Chapter V of the Companies Act which has, as its chapter heading, 'Compromises, Arrangements and Reconstructions', the section relating to arbitration contained therein having been repealed by the Companies (Amendment) Act, 1960. The said chapter, therefore, classifies schemes into three broad categories, viz., schemes by way of compromises, schemes by way of arrangements, and schemes for the reconstruction of a company. Of these three categories, strangely enough, the Act does not define either the term 'compromise' or the term 'reconstruction'. 'Compromise' has, however, been judicially construed in consonance with its popular import as postulating a dispute relating to rights and as a scheme which seeks to be in the nature of a settlement of those disputes. I need not consider the import of the term 'compromise' any further since I am not concerned with it in the present case. The term 're-construction' which has also not been defined by the Act has been judicially construed in England as being applicable to a scheme under which a company transfers its assets to a new company, in consideration of the assignment of the new company's shares to the first company's members, and if the first company's debentures are not paid off, in further consideration of the new company issuing debentures to the first company's debenture holders (Pennington's Company Law, 2nd edition, page 727). I am not concerned any further in the present case with the true connotation of the term 'reconstruction', except for the purpose of construing the term 'arrangement' with which I am directly concerned in this case. In my opinion, any scheme, other than a scheme by way of compromise or reconstruction, which affects the rights of the creditors and the members of the company or any class of them, would fall within the third term used in the chapter heading, viz., 'arrangements'. The term 'arrangement' is defined in section 390(b) of the Companies Act as including a reorganization of share capital. Being an inclusive definition, it is not really useful, except to this extent, that it must follow that whatever else is included in the term 'arrangement', a reorganization of the share capital would certainly be included since it is expressly mentioned in that definition. That being the position, in order to find out the full import of the term 'arrangement', one is relegated to its meaning as a matter of plain language and to the context in which it is used in Chapter V of the Companies Act. The word 'arrange' has, as one of its meaning, in the Shorter Oxford Dictionary, 3rd edition, 'to come to an agreement or understanding', and the word 'arrangement' has, as its primary meaning, 'the action of arranging'. As a matter of plain language it would, therefore, follow that the term 'arrangement' means any agreement or understanding between the parties concerned. Section 391(1), however, in my opinion somewhat restricts this otherwise unlimited import of the term 'arrangement' in so far as the said section applies only to an agreement or understanding between the company and its creditors or any class of them, or between the company and its members or any class of them, or between the company and its members or any class of them, which would necessarily mean that it must be an agreement or understanding which affects their rights. Viewed in this context, it is not surprising that section 390(b) includes, ex majore cautela, a reorganisation of share capital within the definition of the term 'arrangement', because that must necessarily affect the rights of the members.
7. Having considered in the preceding paragraph what according to me is the meaning to be given to the word 'arrangement' in Chapter V of the Companies Act, I will turn to the relevant sections occurring in that Chapter. Section 391, which corresponds to section 206 of the English Companies Act, 1948, deals with the procedure to be followed in all cases for effecting compromises or arrangements. Section 394, which corresponds to section 208 of the English Companies Act, 1948, which corresponds to section 208 of the English Companies Act, 1948, lays down the special directions which the court may give during or after the proceedings for sanction under section 391 in the case of certain types of compromises or arrangements out of those mentioned in section 391, viz., (a) where it is a compromise or arrangement which involves reconstruction or amalgamation, or (b) where it is a compromise or arrangement which involves the transfer of an undertaking, property or liabilities of one company to another. Section 394 cannot, of course, apply if the scheme in question does not fall under section 391. Then we have section 395 of the Act which deals with what in English law is sometimes called a 'take-over' and corresponds to section 209 of the English Companies Act, 1948. Though Weinberg in his Take-over and Amalgamations, Pennington in his Company 2nd edition, at page 4, seeks to draws a distinction between a take-over and an amalgamation, Pennington in his Company Law, 2nd edition, at page 739, calls it an indirect way of carrying out an amalgamation. Section 396 of the Act deals with a compulsory amalgamation for which powers are given to the Central Government in public interest. Sections 395 and 396, therefore, deal with two particular types of amalgamations.
8. It is not disputed that the present case is one of an 'arrangement' by the transfer of the undertaking within section 391 read with section 394(b) as far as the transferor company is concerned, and indeed the present petition is one under those sections. What Mr. Advani has contended, however, is that the respondent-company, which is the transferee company, must also apply to the appropriate court under those very sections. Sections 391 and 394 do not expressly state that, in the case of the transfer of an undertaking, property or liabilities by one company to another, those sections would apply only to a transferor company. Mr. Sorabjee's arguments for submitting that sections 391 and 394 do not apply to a transferee company are three-fold :
(1) In the case of the transferee company there would be no question of any arrangement between the company and its members, since what is done is merely to buy over certain assets'
(2) English practice does not warrant any application by transferee company; and
(3) The definition of the term 'company' in section 390(a), as interpreted by this court in Seksaria Cotton Mills Ltd. v. A. E. Naik 1, shows that section 391 cannot apply to a company which is in a sound financial condition, and cannot therefore apply to a transferee company. I will now proceed to deal with each of these three arguments of Mr. Sorabjee.
9. Dealing with his first argument, in my opinion, in the case of the transfer of its undertaking, property and liabilities by one company to another, the transaction may or may not affect the rights of its members or creditors. If, however, it does affect the right of its members or creditors, either because it involved a reorganisation of its share capital or otherwise, it would certainly fall within the term 'arrangement' and, in that event, proceedings by the transferee company in the appropriate court under sections 391 and 394 would be necessary. It must follow that, if a scheme by way of transfer of undertaking does not affect the rights of the members or creditors of the transferee company, as between themselves and the company, or does not involve a reorganisation of the share capital of the transferee company, no application by the transferee company under section 391 or section 394 would be necessary. This, in my opinion, is the clear position as it emerges on a careful analysis of the relevant statutory provisions. This view which I have taken derives support from the decision of a single judge of the Calcutta High Court in the case of In the matter of Carron Tea Co. Ltd. 2 Dealing with this very point, it is stated in the judgment in the said case at pages 293 to 295 that the word 'includes' in clause (b) of section 390 makes the meaning of 'arrangement' illustrative so that it may be said that arrangement may embrace all kinds of re-organisation of the share capital of a company; that sub-clauses (ii) and (iii) of clause (b) of section 394(1) are referable only to a transferee company and the court cannot bind the transferee company to do those things unless they were before the court; that, therefore, the said provisions suggest that both the transferor and the transferee company should make an application under section 394; and that the learned judge had, therefore, no hesitation in holding that each of the amalgamating companies must comply with the requirements of section 391(1) of the Companies Act. I agree with the view taken by the learned judge in the said case, but I desire to make it clear that I am not holding that an application by the transferee company under sections 391 and 394 is necessary in every case. In my opinion, having regard to the fact that the said sections make no distinction between a transferor company and a transferee company, the test for determining whether the provisions of those sections are attracted or not must be the same, both in the case of the transferor company as well as in the case of the transferee company, viz., whether as between the company and its members or creditors, the proposed arrangement or compromise affects the rights of those members or creditors, or any class of them.
10. I must, therefore, now proceed to consider whether the scheme in the present case is one which would affect the rights as between the transferee company and its members, or as between the transferee company and its creditors, or any class of them. It has not been disputed that, in order to carry out the scheme in the present case, the transferee company would be required to issue a new type of equity shares not hitherto issued. Though section 2(12) of the Companies Act defines the terms 'debenture' as including 'bonds', and the convertible bonds as well as the redeemable bonds which the shareholders of the transferee company are to receive, would, therefore, be debentures, it is also not disputed that these would be new issues, in so far as the transferee company has not issued till now 8% convertible bonds of Rs. 100, or 8% redeemable bonds of Rs. 116. I have, therefore, no hesitation in coming to the conclusion that, having regard to the facts of the present case, the scheme of transfer of the undertaking, properties and liabilities of the transferor company would necessarily affect the rights as between the transferee company and its members, and also as between the transferee company and its creditors who, as Mr. Advani has pointed out, have had no say at all in this matter till now. It is not necessary for me to decide whether this amounts to a reorganisation of share capital but, if necessary, I would hold that it does.
11. Turning next to the second argument of Mr. Sorabjee, he has referred me to passages from standard English works on point, but, I am afraid, they do not throw any light on the question as to whether or not an application by the transferee-company is necessary in a case like present one. Palmer's Company Law, 21st edition, pages 706-707, Buckley on the Companies Act, 13th edition, page 418, as well as The Supreme Court Practice, 1970, volume I, page 1343, all reproduce merely the practice as laid down by Bennett J. in  W.N. 121 to the effect that the court will not make an order binding on a transferee-company which has not yet come into existence but will make an order binding on the petitioning companies and refer it to the Registrar to make in the presence of the transferee-company, such orders as may be necessary. Bennett J. further laid down :
'The same practice will be followed where the transferee is an existing company and before the court, except where the court considers that the matters raised by section 154 can be conveniently dealt with on the hearing of the petition to sanction the scheme.'
12. Pennington in his Company Law, 2nd edition, at page 734 et seq, as well as Weinberg on Take-over and Amalgamations, 2nd edition, pages 67-68 also do not throw any light on the problem before me. The position, therefore, is that there is nothing in the English law or practice which would support Mr. Sorabjee and lead to the conclusion that, in the case of a scheme of arrangement, an application by the transferee-company under sections 206 and 208 of the English Companies Act, 1948, is not necessary.
13. I will now turn to the third argument of Mr. Sorbjee which was founded on the definition of the term 'company' in section 390(a) of the Companies Act as interpreted by Tarkunde J. in his decision in the case of Sekaria Cotton Mills v. A. E. Naik 1. The question which had to be decided by Tarkunde J. was whether the sales-tax department was a creditor of the company at the date on which the scheme of reconstruction was sanctioned by the court, in which case it would be bound under that scheme to receive only 25% of the amount of sales tax found to be due to it. The respondents contended that the sales-tax department did not become a creditor till the orders of assessment were passed subsequent to the sanctioning of that scheme of reconstruction, and that the mere fact that notices had been served prior thereto did not make them creditors so as to be bound by the scheme. It was in that context that Tarkunde J. proceeded to consider the scope and applicability of section 391 of the Companies Act, and, in doing, so observed that the said section could not apply to a company which was in a sound financial condition. With respect to the learned judge, it was sufficient for him to take the view that, in the case of company which was not in a sound financial condition, a scheme is an alternative mode of winding-up and the word 'creditor' in section 391 should, therefore, have the same wide meaning as in liquidation proceedings. It was not at all necessary for him to go further and state that section 391 cannot apply to a company which is in a sound financial condition. His observation to that effect is, in my opinion, therefore, nothing more than an obiter dictum and is not binding upon me. Moreover, I do not agree with the same. To accept that contention would mean, as Mr. Advani has rightly submitted, that two prosperous companies could never amalgamate for their mutual benefit, which is contrary to well-established law and practice. In my opinion, the definition in clause (a) of section 390 merely states that a company which seeks to resort to the provisions of the said chapter must be one which is 'liable' to be wound up under the Act, and not that it should be one which is in such a financial condition as to be 'capable' of being wound up under the Act. Mr. Sorabjee's contention based on definition in section 390(a) that the provisions of section 391 cannot apply to a transferee company, since it would be in a sound financial condition must, therefore, also stand rejected.
14. In the result, the three arguments of Sorabjee stand rejected and I make the petition absolute in terms of prayer (a) .....
3. For sub-clause (d) of clause 15 of the Scheme of following shall be substituted :
'the sanction by the appropriate High Court under section 391 of the companies Act, 1956, and the necessary orders under section 394 of the said Act, being obtained, both by the transferor-company as well as by the transferee-company.'