P.D. Desai, J.
1. These two petitions have been filed by the Bank of Baroda Ltd. (hereinafter referred to as the 'transferor-company') for the sanction of the court to a scheme of arrangement for its amalgamation with Mahindra Ugine Steel Company Ltd. (hereinafter referred to as the 'transferee-company') under section 391 of the Companies Act, 1956 (hereinafter referred to as 'the Act'), and for consequential directions under section 394 of the Act.
* * * *
2. I must now turn to the consideration of the question as to whether sanction should be accorded to the scheme. It is well-settled that in exercising its discretion in according sanction, the court will consider, first, whether the statutory provisions have been complied with; secondly, whether the classes were fairly represented by those who attended the meeting and whether the statutory majority were acting bona fide, and, thirdly, whether the scheme is such as a man of business would reasonably approve. Bearing in mind these principles, the scheme may be examined.
3. I might deal first with the legal objection raised on behalf of the Central Government. As stated earlier, the contention of the Central Government is that the scheme is of such a nature that it would affect the rights of the members and creditors, if any, of the transferee-company, as between themselves and the company, and that it would also involve a reorganisation of the share capital of the transferee-company. Under the circumstances, unless the transferee-company takes steps under section 391 and 394 of the Act in appropriate forum and obtains requisite approval and sanction for the scheme, it should not be sanctioned by this court. No such steps, the argument proceeded, are shown to have been taken and as such the petitions deserve to be dismissed in limine, for without such approval and sanction, the scheme would be wholly unworkable. Now, it is apparent that the scheme under consideration is one which might affect the rights of the members and/or creditors, if any, of the transferee-company, as between themselves and the said company, and that it will also require a reorganisation of the transferee-company's share capital. It is well-settled by the decision of this court in In re Kril Standard Products Pvt. Ltd. and the decision of the Bombay High Court in Bank of India Ltd. v. Ahmedabad Mfg. & Calico Printing Co. Ltd. that of the Calcutta High Court In the matter of Corron Tea Co. Ltd. and that of the Madras High Court in In re Union Services Private Ltd. that, in such a case, before the scheme of amalgamation can take effect, the transferee-company must also approach the appropriate court under section 391(!) of the Act and seek proper directions for convening meetings of those affected by the scheme and get the approval of the concerned persons in the prescribed manner and also obtain sanction and directions of the appropriate court under section 391(1) and section 394 of the Act. It is beyond the pale of controversy, therefore, that the transferee-company will also have to initiate proceedings in the appropriate court under sections 391 and 394. This requirement appears to have been in the contemplation of the transferor and transferee company and, therefore, a provision seems to have been made in sub-clauses (c) and (d) of clause 14 of the scheme that it was conditional upon and subject to agreement by the requisite majorities and also to such court sanctions and orders as might be legally necessary or requisite under the Act and further that, in the event of any such agreements, sanctions or orders not being obtained or passed within the agreed time-limit, the scheme sanctioned by this court would by its own force be subject to agreements, sanctions and orders to be obtained by the transferee-company under sections 391 and 394. Counsel for the transferee-company stated to the court that the said company has already initiated proceedings under section 391(1) in the Bombay High Court and pursuant to the directions given therein it has convened meetings of the persons affected on April 6, 1975. In these circumstances, sanction of this court to the scheme cannot be withheld, if it is otherwise required to be given in the circumstances of the case, on the ground urged on behalf of the Central Government. The sanction would not of its own force make the scheme operative and, in order that it might become effective, conditions abovementioned laid down in the scheme will have to be satisfied. The objection raised on behalf of the Central Government is, therefore, unsustainable.
4. It is true that when the registered officers of the transferor and transferee-companies happen to be situate in different places within the jurisdiction of two different High Courts, as in the present case, the compulsion of practical difficulties has necessitated the evolution of this somewhat ingenious formula. I cannot help observing, however, that the solution is far from happy and that in some cases the resultant situation might be embarrassing, especially in those cases in which, in the absence of a provision similar to that contained in clause 14 of the scheme herein, the court in invitum has to accord sanction to a scheme subject to its approval and sanction by another company and court. In such a case, the High Court which is first moved for according sanction to a scheme of amalgamation - and it would ordinarily be the High Court within whose jurisdiction the registered office of the transferor-company is situate-will, if it sanctions the scheme, make a judicial order which will be conditional upon the approval of the scheme by the shareholders and creditors, if any, of the other company as well as upon the sanction of the scheme by the High Court within whose territorial jurisdiction the registered office of such other company is situate. Such an anticipator or conditional judicial order, which depends for its becoming operative not only upon the concurrence of another court but also upon the will of the members and creditors, if any, of one of the parties to the amalgamation scheme, is possibly unknown to any other jurisdiction, particularly when it is realised that the order would be ordinarily made after full debate and deliberations. What is more, the possibility of conflicting orders being passed by two courts with regard to the same scheme cannot be altogether ruled out because the scheme might be looked at by all concerned from two totally different angles. One of the courts might sanction the scheme whereas the other might sanction it subject to certain modifications or it might altogether refuse to sanction it. This possibility is inherent in the very situation. If the court to which the petition for according sanctions is presented earlier in point of time, say by the transferor-company, not only gives anticipatory sanction but also makes a conditional order giving consequential directions under section 394 including the directions as to dissolution, it might possibly be urged that it becomes functus officio upon the passing of such orders and that if any modification is made in the scheme by the court to which a similar petition is subsequently presented by the transferee-company, it would have no jurisdiction to modify the scheme so as to bring it in line with the scheme as amended by the other court. Such a result would bring about a complete deadlock and the situation can presumably be remedied only by an appeal to the higher court. I am not expressing any opinion on the validity of such a contention; it may be right or wrong; it might be possible to urge that even in such a case the court can still exercise powers under section 392 and find a suitable way out. But the possibility of some complications arising in such a situation cannot altogether be ruled out. There is also one more angle from which the question requires to be examined. In respect of some of the matters contemplated by sub-section (1) of section 394, both the courts would be required to pass orders giving suitable directions and it is somewhat incongruous that provision be made for the same thing or matter by two different judicial orders passed by two different courts presumably on two different dates. Could the legislature have really envisaged a situation of this nature Even if both the amalgamating companies are required to initiate proceedings under sections 391 and 394, would it not be conducive to the achievement of the legislative object if the jurisdiction to sanction the scheme after following the prescribed procedure in relation to both the companies is exercised on a comprehensive view of the whole matter by one court alone Is it possible jot bring about this result by interpreting the word 'court' occurring in sections 391 and 394 in a manner which requires departure from its definition contained in section 2(11) having regard to the subject and context Or is it a situation which can be remedied only by legislative intervention by way of amendment These are some of the most (sic) questions which suggest themselves to me. But I choose not to express any opinion on them in the present case and reserve liberty to consider them on an appropriate occasion in the future, for, having regard to the presence of clause 14 in the scheme, I will not be required to make a conditional order of sanction. In this context I might observe that on a perusal of the decisions of this court and that of the Bombay High Court referred to earlier, it appears that in both those cases the courts proceeded on the footing that the petition by the transferee-company will have to be filed in the court within whose territorial jurisdiction the registered office of such company was situate. The questions posed above, and more particularly the question relating to forum, were not raised nor considered in those cases from the above angle. The question is still, therefore, open for consideration and, as I said earlier, it might, if necessary, be considered on a future occasion. The only course which I propose to chalk out so far as the present case is concerned is that if ultimately I accord sanction to the scheme, I will reserve the giving of directions under section 394(1) until after proceedings initiated by the transferee-company under sections 391 and 394 have successfully terminated in the Bombay High Court. The adoption of this procedure has at least one distinct advantage. Unlike a case in which conditional orders are made not only sanctioning the scheme but also making provision for consequential matters, on adoption of the above procedure in the present case, I would undoubtedly retain seisin over the matter and would be unquestionably in a position to make suitable orders, if necessity arises, either under sub-section (1) or sub-section (2) of section 392 and thus prevent a possible deadlock. As presently advised, I do not wish to go further than this.
* * * *
5. During the course of hearing, I raised the question whether the transferor-company was a 'banking company' within the meaning of the Banking Regulation Act, 1949 (hereinafter referred to as the 'Banking Act') so as to require a certificate in writing from the Reserve Bank under section 44B of the said Act to the effect that the scheme in question was not incapable of being worked and was not detrimental to the interests of the depositors of the banking company. In the affidavit dated March 28, 1975, made by Shri B. K. Daftari it has been stated on behalf of the transferor-company that ever since the transfer of the entire undertaking of the company to the Bank of Baroda by virtue of the provisions of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, the transferor-company has ceased to be a banking company. It does not carry on banking business in India and the licence dated October 14, 1952, granted to it by the Reserve Bank of India authorising it to carry on such business has also been cancelled. It has been further averred that under section 2 of the Banking Act, the provisions of the said Act were in addition to and not, save as therein expressly provided, in derogation of the Companies Act, and that, therefore, the provisions of the Banking Act were not applicable to the scheme of amalgamation in this case, especially because it did not pertain to amalgamation with any other banking company. Counsel for the transferor-company has not addressed any argument nor rendered any assistance at the hearing on this point and the said company has chosen to rest satisfied with the contention raised in the aforesaid affidavit which does not even deal with section 44B. Now, it is apparent that the contention based on section 2 of the Banking Act is wholly misconceived. Sections 44A and 44B of the Banking Act start with a non-obstante clause and they are express provisions in derogation of the Companies Act to the extent therein provided. Section 44B expressly enacts, inter alia, that no High Court shall sanction a scheme of arrangement between a banking company and its members or any modification of such scheme unless requisite certificate is issued by the Reserve Bank. It is, therefore, clear that if the transferor-company still retains its character as a banking company within the meaning of the Banking Act, this court will have no jurisdiction to sanction the scheme unless the certificate of the Reserve Bank under section 44B is procured and produced. The question which, therefore, arises is whether the transferor-company can be called a banking company within the meaning of the Banking Act.
6. Clause (c) of section 5 of the Banking Act defines 'banking company' to mean 'any company which transacts the business of banking in India'. There is an Explanation to the said clause which says that any company which is engaged in the manufacture of goods or carries on any trade and which accept deposits of money from the public merely for the purpose of financing its business of banking within the meaning of the said clause. Clause (b) of section 5 defines 'banking' to mean 'the accepting, for the purpose of lending or investment, of deposits of money from the public payable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise'. It would thus appear that in order to constitute a banking company within the meaning of the Banking Act, two conditions must be satisfied : first, that the company in question must be transacting business and, secondly, that such business must consist of acceptance of deposits of money from the public, either for lending or for investment, and such deposits must be repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise. It is well settled that the word 'business' connotes some real, substantial and systematic or organised activity or conduct with a set purpose. (See Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax. Therefore, for a company to be designated as a banking-company, it must be shown that it is engaged in any systematic or organised activity or conduct aimed at acceptance of deposits of money from the public repayable on demand and withdrawable by cheque, draft or the like.
7. It would not be out of place to mention that even according to the accepted legal concept of banking business, it must satisfy the same tests as are prescribed by the statutory definition contained in section 5(c). In Hart's Law of Banking, a banker or bank has been defined as 'a person or company carrying on business of receiving moneys and collecting drafts for customers subject to the obligation of honouring cheques drawn upon them from time to time by the customers to the extent of the amount available on their current accounts'. Sir John Paget in his book on Banking has observed :
'No person or body corporate or otherwise can be a banker who does not, (i) take deposit accounts, (ii) take current accounts, (iii) issue and pay cheques, and (iv) collect cheques, crossed and uncrossed, for its customers.'
8. Sheldon in his book on the Practice and Law of Banking states :
'A person cannot claim to be carrying on the business of banking unless he receives money or instruments representing money on current account, honour cheques drawn thereon and collects the proceeds of cheques which his customers place into his hands for collection.'
9. In Halsbury's Laws of England, third edition, volume 2, article 277, at pages 150-151, it has been observed :
'A 'banker'is an individual, partnership or corporation whose sole or predominating business is banking, that is, the receipt of money on current or deposit account and the payment of cheques drawn by and the collection of cheques paid in by a customer.'
10. It would thus appear that both by virtue of the statutory definition of 'banking company' as contained in the Banking Act and according to the accepted legal connotation of the said expression, no corporate body could be said to be carrying on the business of banking unless it systematically and habitually accepts deposits from the public and allows the same to be drawn against as and when the depositor desires by a cheque, draft, order or some other suitable mode. The question then is : does the transferor-company satisfy this test
11. Now, it is true that the transferor-company was formed with the predominant, if not the sole, object of carrying on banking business and that it in fact carried on such business till July 19, 1969. However, on and with effect from the said date under the provisions of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, its entire undertaking was vested in a new bank which was set up with a name substantially identical with the name of the transferor-company and which was authorised to carry on banking business previously carried on by the transferor-company. The transferor-company's managerial and other staff and premises stood transferred to the corresponding new bank. Its existing business and indeed its right to carry on banking business by virtue of the licence issued under the relevant law was transferred to the new bank. It was deprived of all its assets, property, cash balances, reserve funds, etc., and its liabilities and obligations were taken over by the new bank. Consequently, the deposits made with it by the public and its corresponding liability to repay the deposits stood transferred by law to some other bank. In the case of the transferor-company section 5(6) of the 1970 Act is not attracted and it has no business of banking in any country outside India which has not been taken over. Its existing banking business thus came to an end on July 19, 1969. It has since not applied for and obtained a new licence and has not accepted deposits from the public. Indeed, a business organisation deprived of its right to carry on business under the existing licence, its assets and undertakings, its managerial and other staff, its premises, its goodwill, a substantial part of its trading name, even if it has a theoretical right to obtain a fresh licence and carry on banking business by virtue of its memorandum of association, would not in fact be able to do such business. For this reason presumably, the board of directors of the transferor-company took a decision that it was not in the interests of the members to start new business and they have invested the sale proceeds of the compensation bonds in short-term deposits and loans pending finalisation of the amalgamation scheme. A company which in circumstances aforesaid decides to amalgamate with another company and actively pursues such a cause leading ultimately to its dissolution in the near future cannot be said to be carrying on business. In the context, the mere fact that the transferor-company was incorporated to carry on banking business does not necessarily show that it is in fact carrying on that business. The objects of an incorporated company as laid down in the memorandum of association are certainly not conclusive of the question whether the activities, if any, of the company amount to carrying on of business. (See Bengal and Assam Investors Ltd. v. Commissioner of Income-tax and Lakshminarayan Ram Gopal & Son Ltd. v. Government of Hyderabad). The transferor-company is, thus, so far as the actual transaction of business is concerned, in no better position than that in which it was at the very moment of its incorporation. In truth and reality, it is in a worse position with its impending self-invited dissolution.
12. In this connection it is required to be borned in mind that section 44B of the Banking Act has been enacted primarily with a view to protecting the interests of the depositors of a banking company. The Reserve Bank, which has statutory powers over commercial banks and which controls the credit structure, has been constituted as an additional authority to scrutinise the scheme of amalgamation relating to a banking company before it is sanctioned by the court since it is in a special position to assess the merits of such a scheme from the point of view of depositors. Unless, therefore, a company applying for the sanction of a scheme of amalgamation under sections 391 and 394 is truly a banking company dealing with depositors, intervention of the Reserve Bank would not advance the object of the legislature in enacting section 44B. It would not serve any useful purpose to stretch the language and to insist upon the certificate of the Reserve Bank in respect of a company which carries on no business at all, much less banking business.
13. It is true that there are some decisions which have taken the view that even if by reason of some supervening circumstances a banking company is unable for the time being to carry on its business, it would not any the less be a banking company and that it is not necessary for a company to be classified as a banking company that it should be in a position to accept deposits at a given point of time. (See, for example, Jwala Bank Ltd. v. Shitla Parshad Singh, K. V. S. Vassan Bros. v. Official Liquidator, Kalipada Sinha v. Mahalaxmi Bank and Official Liquidator, Puri Bank v. Ramniklal Joshi). However, these were cases in which a banking company was either in liquidation or was prohibited under a statutory order or a scheme of arrangement from accepting fresh deposits. It does not appear that the licences of the banks in those cases were cancelled. Those banks were not deprived of their undertakings including assets and liabilities. In such cases it could hardly be said that merely because of some impediment having been placed in their banking business or money on account of the fact that they were being wound up, the said companies lost their basic character as a banking company. Such a company would still have accounts of the old depositors and merely because it has been prevented from accepting fresh deposits or has refrained from accepting fresh deposits or is winding up its business, it could not be said that its very existence as a banking company has come to an end.
14. It is also true that the word 'bank' finds place in the name of the transferor-company and that under section 7 of the Banking Act no company, other than a banking company, can use as part of its name such a word. However, it cannot be overlooked that the name was chosen when the company was incorporated with a view to carrying on banking business. The situation has changed materially since then and now the legislature has brought into existence another bank of almost the same name carrying on banking business. The transferor-company presumably did not take steps to have its name changed only because of its impending dissolution upon amalgamation. This circumstances cannot, therefore, be over-emphasised. Similarly, the fact that the Reserve Bank thought it necessary to cancel the licence under section 22 of the Banking Act is also not very relevant. Such an action was but a formality, if not a meaningless exercise, because, as stated earlier, the entire undertaking including the right to carry on banking business under such a licence has already been acquired under section 4 read with section 5(1) of the 1970 Act. For the same or similar reasons the issuance of a notice under the provisions of sub-section (2) of section 36A of the Banking Act notifying that the transferor-company has ceased to be a banking company involves the performance of a superfluous exercise. That apart, the existence of the conditions precedent for the exercise of such power is manifest on the face of the 1970 Act and even assuming that such formal action is necessary and has not been taken still, in the facts and circumstances of the case, it cannot be said for that reason that the transferor-company still continues to be a banking company. In the ultimate analysis, the matter is one of substance and not of form.
15. The conclusion is, therefore, inevitable that the transferor-company is not carrying on any business, much less is it transacting banking business and that it is not a banking company within the meaning of the Banking Act. Section 44B of the said Act is, therefore, not attracted in the facts and circumstances of the case.
* * * *
16. The next question which must necessarily arise for consideration is whether the scheme is such as a man of business would reasonably approve. It was urged by counsel appearing on behalf of the transferor-company that in approaching a scheme of arrangement for amalgamation submitted to the court for its sanction, due weight must be accorded to the fact that it is shown to have been approved by a statutory majority of members who are directly affected by the scheme and that there is no opposition to it. It is not necessary, urged counsel for the court, in such circumstances to scrutinise the scheme closely with that much care with which it might otherwise do unless it appears ex facie that the scheme was unfair, unreasonable or unworkable. My attention was invited to certain observations of this court in In re Manekchowk & Ahmedabad Mfg. Co. Ltd., and it was submitted that in any case the scheme has not got to be scrutinised by the court with that much care with which an expert will scrutinise it nor will it approach it in a carping spirit with a view to pick holes in it. When the statutory majority has sanctioned the scheme acting bona fide, unless there are some strong and cogent grounds to show that it was conceived, designed or calculated to cause injury to others, the court will ordinarily sanction it. Now, I do not wish to throw the smallest doubt on this general proposition and, indeed, sitting singly it would not be open to me, and even otherwise, it would be presumptuous on my part, to question the wisdom of these words which are largely based on rules or principles laid down in a catena of judicial decisions. However, it is essential to remember that in the end what has to be decided in each case is a question of fact, namely, whether to accord sanction or not, and circumstances are so infinitely various that, however, carefully general rules are framed, they must be construed with some liberality and not too rigidly applied. It was necessary to lay down these principles lest the court should be persuaded in every case to substitute its own judgment and impose its own scheme in place of that of those who are to be vitally affected by it and who might have carefully applied their minds to it. The court must be careful, however, to see that the principles laid down are never so narrowly interpreted as to reduce it to a mere registering agency and to prevent it from seeing whether there is such an objection to it as that any reasonable man might say that he could not approve it. So to use these principles would in reality be to misuse them and it would tantamount to abdication of a statutory function and duty imposed on the court and a breach of faith reposed in it by that class of small shareholders who for obvious reasons cannot and do not participate in the meeting or in the proceedings before the court and also by the dissident members who look upon the court to protect their interests even if they are not present before it having regard to the costs and inconvenience involved. The court cannot, therefore, adopt a laissez faire attitude of the kind suggested by counsel merely because the requisite majority has passed the scheme and no discordant voice is heard in the court. That apart, there are other equally good and weighty reasons why such an approach is not justified. In the first place, in the modern times, the industrial Government, in which a middle class investor has a vital stake as a shareholder, has become a complex structure. It is a hard reality that its leadership is sometimes vested in the hands of a few businessmen occupying strategic position of great power. These business leaders often promote schemes of amalgamation which may appear at first sight to be sensible, prudent, any, even beneficial to the shareholders, but which may in fact conceal the clever design of those whose personal interest may be adverse to those of the innocent investors. Since these business magnates usually hold controlling interest in the equity capital of the company or can procure proxies in diverse ways and since the few shareholders who personally attend the meeting do not necessarily represent the informed opinion, such schemes are often pushed through even with more than the statutory majority. Secondly a new class of shareholders has entered into the picture which has got to be reckoned with in view of its power and prestige. Financial institutions, statutory corporations and governments hold shares in certain joint stock companies and sometimes between themselves they acquire controlling interest. In the case of the transferor-company itself, we find that out of its 5,00,000 shares, eight corporate bodies hold 2,27,373 shares and two governments hold 36,339 shares. Their total shareholding comes to approximately 53% of the paid up capital of the company. Now, this class of shareholders being usually well informed scrutinises the scheme with an expert's eye and it is presumed to act bona fide and for the benefit of the company as a whole. However, the possibility cannot be ruled out that they might be in a position to gain more from the scheme than other members of the class by reason of their interests in some other capacity; for example, they might give up something in favour of the transfer-company since they also hold shares in the said company and their such interest may be sufficient to obtain for them a greater benefit in that capacity than what they lose by their sacrifice as members of the transferor-company. Thirdly, it cannot be overlooked that section 392 of the Act expressly confers very wide powers on the court including the power to give such directions in regard to any matter or to make such modifications in the scheme as it may consider necessary for its proper working and to supervise the carrying out of the scheme. The power conferred is exercisable not only at the time of making an order sanctioning the scheme but also at any time thereafter. Such power is not conferred on English courts by statute nor was it conferred on Indian courts under section 153 of the Indian Companies Act 1913. Section 394(!) furthermore authorises the court to make provision for those who dissent from the scheme. In our country, therefore, the role which the courts have to play now is more vital and potent; it is not only an inquisitorial and supervisory role but also a pragmatic role which requires the forming of an independent and informed judgment as regards the feasibility or proper working of the scheme and making suitable modifications in the scheme and issuing appropriate directions with that end in view. Lastly, the court must also take into account the interests of the employees and ensure that they are not adversely affected by the scheme and that adequate provision is made for them. This is necessary not only to protect the employees but also to safeguard industrial peace in which the society at large has a vital interest. This class of persons affected by the scheme has no locus stand in the meeting and the judgment of the majority in their regard need not necessarily be of great value or a safe guide.
17. It may be pointed out that judicial decisions on the point do not seem to lay down that the discretion of the court in the matter of granting sanction to a scheme approved by the statutory majority is in any manner restricted. In the leading English decision in In re Alabama, New Orleans, Texas and Pacific Junction Rly. Co. Bowen L.J. observed :
'It is not, as it seems to me, at all compulsory upon the court to register the decrees of meeting simply because three-fourths in value of the meeting have given that assent which the statute renders a condition precedent to the jurisdiction of the court. The court has still to consider the circumstances.'
18. Fry L.J. expressed the same view in the following words :
'I shall not attempt to define what elements may enter into the consideration of the court beyond this, that I do not doubt for a moment that the court is bound to ascertain that all the conditions required by the statute have been compiled with; it is bound to be satisfied that the proposition was made in good faith; and, further, it must be satisfied that the proposal was at least so far fair and reasonable, as that an intelligent and honest man, who is a member of that class, and acting alone in respect of his interest as such a member, might approve of it. What other circumstances the court may take into consideration I will not attempt to forecast.'
19. In J. S. Davar v. Shanker Vishnu Chandrachud J., speaking for the Division Bench, observed :
'On a review of these authorities and from the provisions in section 153(2) of the Indian Companies Act, 1913, it seems to us clear that the consent of the majority of creditors or shareholders to a scheme does not conclude the issue whether the scheme should be sanctioned. The jurisdiction of the court which is called upon to sanction a scheme transcends the mere consideration that a majority of those affected by the scheme is willing to submit to the scheme. The creditors of a company may agree to accept a fraction of the amount due to them from the company and yet, on considerations of more lasting importance, like public or commercial morality, the court may refuse to accept the verdict of the majority. It may also refuse to accept the scheme on the ground that it is not reasonable may also refuse to accept the scheme on the ground that it is not reasonable or that it is not feasible or that there is no chance that it will yield to a smooth and satisfactory execution. By 'reasonable' is generally meant that the arrangement can reasonably be supposed by sensible business people to be for the benefit of the class which they represent. The court will also not section the scheme if the facts which would have influenced the decision of the majority were to known or disclosed to the majority, or if the sponsors of the scheme have misrepresented the true position of the company. Finally, if the acceptance of the scheme would lead to the stifling of an inquiry into the conduct of the delinquent directors, the court would be slow to give its sanction to the scheme. Considerations such as those mentioned above must be taken into account by a court before a scheme is sanctioned but, in the very nature of things, it is not possible to enumerate exhaustively the circumstances which a court is entitled to take into consideration.'
20. In In re Kril Standard Products P. Ltd. this court (D. A. Desai J.) observed :
'I have been often told that the court should not try to substitute its judgment for the commercial judgment of those interested in the company as expressed in various meetings. That apart, the court still has a discretion in the matter and the court is not a mere rubber stamp because the scheme has been approved by a statutory majority in various meetings. The zeal with which attempt is made to acquire controlling block of shares in companies, it is not difficult for the industrialists to push through the scheme with the majority at their beck and call but the court cannot abrogate the discretion in favour of such a majority. Therefore, the court must and should examine the scheme on its own merits.'
21. No useful purpose will be served by multiplying authorities. In Davar's case all the relevant decisions, English and Indian, have been considered.
22. In view of the foregoing discussion it appears to me that the court cannot abdicate its duty to scrutinise the scheme with vigilance and act as a mere rubber stamp simply because the statutory majority has approved it and there is no opposition to the scheme in the court. So much weight cannot be attached to the view of the statutory majority as to require the court to mechanically put its imprimatur on the scheme. The court is not bound to treat the scheme as a fait accompli and to accord sanction merely upon a casual look at it. It must still scrutinise the scheme to find out whether it is a reasonable arrangement which can be reasonable people conversant with the subject be regarded as beneficial to those who are likely to be affected by it. In the pursuit of such inquiry, the court is not tied down by any rigid principles or strait-jacket formulas and no enumeration contained in judicial decisions of the factors which can be taken into account, howsoever precise, can be treated as exhaustive so as to limit the scope of the inquiry which, having regard to varying circumstances, might differ from case to case. The burden lies on the petitioner company to show that the scheme of amalgamation is fair, reasonable, workable and such that a man of business would reasonably approve. The court would, of course, take into account the fact that it has been approved by big majority vote, but it would not shirk its duty to scrutinise the scheme, especially when it involves amalgamation of large companies in which many interests are at stake.
23. The scheme may now be examined against this background. The relevant particulars of the scheme have been set out earlier and they need not be restated. It has to be borne in mind that under the scheme only the interests of shareholders - that too of one class - are directly affected. The scheme has received the approval of more than the statutory majority. Nearly 53% of the shareholders consist of enlightened corporate managements, financial institution and Governments and it would not be unreasonable to assume that they must have approved the scheme after minute and thorough examination. There is nothing to show that they have not acted bona fide. There is no material on record to indicate that they had greater stakes in the transfer-company so that they agreed to the scheme notwithstanding that it was not in the interests of the transferor-company as such. None of the directors of the transferor-company hold shares in the transferee-company and they do not derive any special benefit from the scheme. The minority shareholders, who opposed the scheme at the meeting, have not conveyed their opposition to the scheme in response to the public notice nor has any such shareholder appeared at the hearing of these petitions to urge as to why the scheme should not be sanctioned. The official liquidator has not found anything objectionable upon his scrutiny of the books and papers of the company. The Central Government undoubtedly opposed the petition but the objection, which was of a technical nature, has been found to be not fatal to the petition. It would thus appear that there is no substantial opposition to the scheme from any quarter. The relative financial position of the transferor and transferee-companies and their business potential have been adverted to earlier. The board of directors of the transferor-company after mature deliberations found that it was not in the interests of the transferor-company to undertake any new business. The alternative which commended itself to them as being in the interests of the shareholders was to amalgamate it with some other concern of repute and with growth prospects. This decision based on their commercial judgment seems to be pre-eminently justifies even on practical considerations, for, the transferor-company has been deprived of every thing and all that it is now possessed of is liquid capital. The only other alternative could have been to wind up the company and to distribute its assets amongst members. The present scheme, however, provides a better choice since it offers an option to the members either to accept cash payment or to become members of the transferee-company. The transferee-company is a well-organised industrial unit manufacturing one of the basic raw materials required for diverse industries including defence oriented industries. It has reached its production target within about two years of the establishment of its factory and has now undertaken an ambitious expansion programme. Its record of sales, profits and development is reported to be satisfactory and its reserves and surpluses are fairly good. It has been paying dividend regularly on its equity capital since 1970. The proposed scheme, if sanctioned, would, on the one hand, place at the disposal of the transferee-company a fairly large amount which would greatly augment its internal resources and facilitate its expansion programme and, on the other, it would enable the members of the transfeor-company while enjoying immediate return on their investment. There is nothing to show that the scheme is not feasible or that it will not yield to a smooth and satisfactory execution. The member so the transferee-company present at the annual general meeting of the said company held on June 25, 1974, have also approved of the scheme and the general meeting has unanimously passed certain resolutions with a view to facilitating the implementation of the scheme. The union of the two companies has thus been regarded as beneficial by those on both sides who are making it. As regards the employees, I have been told at the hearing that only five employees of the transferor-company who have already reached the age of superannuation were continued in service till the scheme of amalgamation is sanctioned with a view to helping the transferor-company and that in these circumstances no provision is required to be made for them in the scheme.
24. From the point of view of the shareholders, there remains only one angle from which the scheme might be examined and it relates to the ration of exchange of shares. The necessary particulars have already been given. In the explanatory statment under section 393 circulated amongst the members of the transferor-company it has been pointed out that as against ten equity shares of the face value of Rs. 100 on which Rs. 50 per share is paid-up, the members of the transferor-company will get equity and debentures of the transferee-company, the total face value of which would come to Rs. 1,630. That apart, the affidavit of Shri P. P. Mistri, secretary of the transferee-company, made on March 28, 1975, discloses that the market value of the shares of the transferor-company, at the time when the scheme was approved by the boards of directors of the two companies, was between Rs. 130 and Rs. 135 per share. The official liquidator has stated in his report that as on June 30, 1974, i.e., the last day prior to the appointed day under the scheme, the equity shares of the face value of Rs. 10 of the transferee-company were quoted in the market at Rs. 25 per share. There is no material on record to indicate as to what was the market value of the equity shares of the transferee-company on the date on which the scheme was approved by the boards of directors of both the companies. However, taking judicial notice of the state of the share market in the days preceding the temporary restriction on payments of dividends imposed by the recent regulations, it would not be unreasonable to proceed on the assumption that those shares must be quoting at the same, if not higher, rate. Proceeding on the basis that the stock exchange quotations offer a safe guide for valuation for the purpose of amalgamation, it would appear that for every ten shares of the transferor-company, the market value of which ranged between Rs. 1,300 to Rs. 1,350 at the material time, the transferee-company will issue ten equity shares in its capital having total market value of Rs. 250 and nineteen convertible and ten non-convertible debentures of the face value of Rs. 25 and Rs. 91.50, respectively, bearing interest at the minimum rate of 8 1/2% per annum. On the basis of their face value, the debentures could be valued at Rs. 475 plus Rs. 915 = Rs. 1,390. There is no evidence to show as to what would be the market value of such debentures if sold on the relevant date. Even assuming, however, that such debentures would sell at an average discount of 20% for the holding of 19 plus 10 debentures, the concerned shareholder would be able to realise a total amount of Rs. 1,112. If the amount of Rs. 250, being the market value of the equity shares of the transferee-company allotted to him is added to the aforesaid amount, his total holding would be worth Rs. 1,362 which is more than the market value of then equity shares of the transferor-company held by him. It would thus appear that by and large the ration of exchange is reasonable and fair and since it has received the approval of the statutory majority and nobody has complained about it before me, the scheme cannot be held to be unfair or unreasonable on that account.
25. There was only one aspect, however, over which my mind was some-what exercised and it related to the exchange ration so far as the members of the transferor-company opting to receive cash payment were concerned. The surrender value of an equity share of the transferor-company has been fixed at Rs. 143 per share. I was told at the hearing that if the shares of the transferor-company were valued on net assets basis, the value of each share would be approximately Rs. 163. The payment of Rs. 143 per share to a shareholder who opts for cash payment appeared, prima facie, to be unfair, particularly in contradistinction to the exchange ratio fixed for those members who may not exercise such option. There was no material on the record to show as to how this ratio was worked out. Under my direction, therefore, the transferee-company placed on record an affidavit of its secretary explaining the basis of the ratio. In the said affidavit dated March 26, 1975, it has been pointed out that after protracted deliberations between the respective boards of directors of the two companies and in consultation with the major shareholders of the transferor-company, namely, Life Insurance Corporation of Indian and Unit Trust of India, the ration was worked out at the said figure. Due consideration was given to the fact that the shareholders opting for cash payment should not get a lower amount as compared to the break-up value of the shares of the transferor-company. However, in determining the said amount, consideration was given to the fact that in the event of liquidation, the shareholders would have received approximately Rs. 137 per share after deduction of tax at source at the prevailing rate of 23% on the surplus over the face value of the shares of the transferor-company. Even this notional figure would have attracted additional income-tax depending upon the income group to which an individual shareholder belonged. The cash option figure was, therefore, determined at an amount which was higher than the said figure and even higher than the prevailing market quotation of the shares of the transferor-company on the date on which the scheme was approved by the board of directors of the respective companies. Besides, on comparison with the other banking companies whose undertakings were taken over and which subsequently entered into a scheme of amalgamation with other running companies, the percentage of cash option provided in the scheme was more favourable. It worked out to nearly 87.73 per cent. of the break-up value of the shares of the transferor-company. It has been further averred in the said affidavit that the option was also fixed bearing in mind that, on the one hand, it did not act as an inducement to the majority of the shareholders to withdraw their funds thus striking at the root of the scheme itself and, on the other, it did not work out at an unreasonably low figure so as to cause loss to the shareholders who did not wish to become members of the transferee-company. By and large I am satisfied, having regard to the considerations mentioned in the affidavit, that it would be difficult to hold that the cash option figure determined in the scheme is unfair or unreasonable. In any case, it has been approved by a substantial majority of persons affected and I have no basis to doubt their judgment.
26. The foregoing discussion, however, reveals that in a matter of this nature, which involves amalgamation of two large companies, it would not be possible for the court to discharge its duty unless sufficient material is placed on record as regards the method and basis of valuation. If there is serious contest on the question of valuation, the court would be unable to accord sanction unless proper material including, if necessary, an expert's report about valuation is placed on record. In fact, it may, in some cases, be desirable, if not necessary, to place such material even before the shareholders in the explanatory statement under section 393, for, such material would help the average shareholders in deciding whether the scheme is in their interest.
27. I must say that counsel for the transferee-company submitted that the question of valuation and fixation of ratio of exchange was a matter of commercial judgment and that the court should not sit in judgment over it. This argument is met by the observations made earlier with regard to the jurisdiction of the court in the matter of granting sanction to a scheme of amalgamation. There is no opposition here and, therefore, the court was not required to go deeper. However, when there is opposition, the court not only will but also must go into the question and if it is not satisfied about fair valuation, it would be justified in refusing to accord sanction to the scheme. Instances are not unknown where courts have refused to sanction schemes where proper valuation was not made (see, for example, In the matter of Carron Tea Co. Ltd. and In re Consolidated South Rand Mines Deep Ltd. It is true that the present procedure might be ill-suited to some extent to the inquisitorial role of the court in the matter of valuation. It is pertinent to note, however, that in a somewhat analogous jurisdiction, namely, in dealing with reconstruction schemes, courts in foreign countries have devised suitable methods. As pointed out by Gower in his book on Principles of Modern Company Law, third edition, at page 645, the Scottish courts make a practice of referring such schemes to a reporter (generally he will be a chartered accountant or solicitor) whose report they consider before confirming the scheme. If, therefore, the existing practice and procedure are found to be inadequate to effectively deal with such problems, the court need not feel stifled. Under our law, its inherent powers to give such direction or pass such orders as may be necessary for the ends of justice and to prevent abuse of the process of the court are saved. This power is wide enough to enable the court to devise similar procedure, if need arises, in our country. New problems require new solutions and the court is not powerless to find such solutions. I do not, therefore, agree that the vote of the majority must necessarily oust the jurisdiction of the court even to inquire into the fairness of the exchange ratio and valuation on the ground that it is a matter of commercial judgment.
28. The foregoing discussion reveals that having regard to the circumstances of the case, no ground exists to withhold sanction to the scheme of amalgamation in its essentially broad features.
* * *(3) The transferor-company shall file with the Registrar of Companies, Gujarat, a certified copy of this order within thirty days from this date;
(4) The transferor-company shall, by a judge's summons, move this court for suitable orders making provision for matters specified in sub-section (1) of section 394 and/or for making Company Petition No. 4 of 1975, absolute in terms of prayers (b), (c), (d), (e), (f), (h) and (i), within fifteen days of the filing with the Registrar of Companies, Maharashtra, of a certified copy of the order made by the appropriate court under section 391(2) of the Act in the application filed by the transferee-company in such court for sanction of the scheme herein;
(5) Liberty is meanwhile reserved to the parties and to persons interested in the scheme to apply to this court, if and when occasion arises, for suitable orders and directions as contemplated by section 392 of the Act;
(6) Company Application No. 31 of 1974 and Company Petition No. 4 of 1975 shall stand over till this court is moved by a judge's summons as directed in clause (4) above or till further orders and all consequential orders including order as to costs shall be made then.