MANU/SC/2143/1996

Equivalent/Neutral Citation: 1996VIIAD(SC )260, AIR1997SC 506, [1996]87C ompC as792(SC ), (1996)4C ompLJ124(SC ), (1996)4C ompLJ124(SC ),
JT1996(8)SC 205, 1996(6)SC ALE595, (1997)1SC C 579, [1996]Supp6SC R1

IN THE SUPREME COURT OF INDIA

Civil Appeal No. 11879 of 1996
Decided On: 11.09.1996
Miheer H. Mafatlal Vs. Mafatlal Industries Ltd.
Hon'ble Judges/Coram:
N.P. Singh and S.B. Majmudar, JJ.
Counsels:
For Appellant/Petitioner/Plaintiff: Shanti Bhushan, Mihir Thakur, Darshan Parekhm, Jay
Salve and J.K. Das, Advs.
For Respondents/Defendant: Soli J. Sorabjee, S.B. Vakil, S. Ganesh, P.N. Kapadia and
U.A. Rana, Advs.
Case Note:
Company - amalgamation - Sections 391, 392, 393, 394A, 433 and 643 of
Companies Act, 1956 - whether scheme of amalgamation is prejudicial to
interests of minority shareholders - scope of Company Court to sanction
scheme of amalgamation is limited - Court can intervene in matter only when
it is not just and fair or prejudicial to interest of share holders - Court cannot
intervene if scheme is sanctioned by majority of shareholders and and is
lawful - Court can only go through scheme and examine whether it has
complied requirements under Section 391 (2) and was passed by requisite
majority or not - scheme passed by company with majority is just and fair and
no minority interest is affected - individual personal interest of minority share
holders is of no concern unless it is affecting class interest of such equity
shareholders - no requirement as to before putting scheme to vote meeting of
minority shareholders has to be convened - appeal dismissed.
ORDER
S.B. Majmudar, J.
1. Leave granted.
2. By consent of learned advocate of parties this appeal was taken up for final hearing.
We have heard the learned advocates of parties. The appeal is being disposed of by this
judgment.
3. This appeal by special leave arises out of the judgment and order of a Division Bench
of High Court of Gujarat in Original Jurisdiction Appeal No. 16 of 1994 decided on 12
July 1996. The Division Bench by the said impugned judgment dismissed the appeal of
the appellant and confirmed the order of the learned Single Judge in Company Petition
No. 22 of 1994 and sanctioned a Scheme of Amalgamation of two Public Limited
companies, namely Mafatlal Industries Limited ('MIL' for short) being the transferee-
company with which Mafatlal Fine Spinning and Manufacturing Company Limited ('MFL'

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 for short) being the transferor-company was to be amalgamated. The learned Single
Judge granted requisite sanction to the applicant transferee-company MIL to
amalgamate in it the transferor-company MFL under Section 391(2) of the Companies
Act, 1956 (hereinafter referred to as 'the Act'). In order to appreciate the grievance of
the appellant who objected to the Scheme moved by the respondent-company MIL, as
ventilated before us by its learned Senior Counsel Shri Shanti Bhusan, assisted by
learned Counsel Shri M.J. Thakore, it will be necessary to glance through a few relevant
background facts.
Background Facts
4 . The respondent-company MIL which was the petitioner before the learned Single
Judge has its registered office at Ahmedabad in Gujarat State. It was incorporated on
20th January 1913 under the name 'The New Shorrock Spinning & Manufacturing Co.
Limited' and its name was subsequently changed to 'Mafatlal Industries Limited' as per
the fresh Certificate of Incorporation dated 24 January 1974 consequent upon change of
name, as sanctioned by the Registrar of Companies, Gujarat, Ahmedabad. The objects
of the transferee-company MIL as per its Memorandum of Association, inter alia,
included activity of carrying on all or any of the businesses such as cotton spinners and
doublers, wool, silk, flax, jute and hemp spinners and doublers, linen manufactures, to
work spinning and weaving mills, cotton mills, jute mills and mills of any other
description. The Authorised Share Capital of the respondent-company was Rs.
100,00,00,000 (Rupees one hundred crores only) divided into 30,05,500 equity shares
of Rs. 100 each and 69,94,500 unclassified shares of Rs. 100 each. The subscribed
Share Capital of the respondent-company as on 31st March 1993 was Rs. 26.30 crores
(Rupees twenty six crores thirty lacs only) divided into 26,90,000 equity shares of Rs.
100 each.
5. The respondent-company commenced the business of textiles and had been carrying
on the same since incorporation. The respondent-company is a large multi-Division,
Multi-locational company currying on diversified activities including manufacturing and
sale textiles, dyes intermediates and chemicals, professional grade connectors, plastic
processing machineries and promoting various companies through Project Promotion
Division.
6 . The MFL being transferor-company was incorporated on 20th April 1931 under the
Baroda State Companies Act and had been carrying on the business of manufacture and
sale of textile piece goods and chemicals. Its registered office was situated at Mafatlal
center, Nariman Point, Bombay. It was engaged in the manufacture and sale of textiles
and fluorine based chemicals. There were three units of the Textiles Division situated at
(1) Vejalpur Road, Navsari, (2) Mazagon, Bombay and (3) Lower Parel, Bombay and the
unit of the Chemicals Division was situated at Bhestan, District Surat.
7. The Authorised Share Capital of the transferor-company as on 31st March 1993 was
Rs. 30 crores (Rupees thirty crores only) divided into 30,00,000 ordinary shares of Rs.
100 each. The Subscribed Share Capita of the transferor-company as on 31st March
1993 was Rs. 26,25,77,100 (Rupees twenty six crores twenty five lacs seventy seven
thousand and one hundred only) divided into 26,25,771 ordinary shares of Rs. 100
each. Subsequent to 31st March 1993 the transferor-company had allotted 382 ordinary
shares of Rs. 100 each. The transferor-company had also issued and allotted further
1,00,000 ordinary shares of Rs. 100 each at a premium of Rs. 200 per share on
conversion of 1,00,000 Partly Convertible Debentures of the face value of Rs. 2,000
each issued to Financial Institutions with effect from 1st February 1994 by the

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 transferor-company.
8 . The transferor-company MFL is proposed to be amalgamated with the respondent-
company MIL under the following circumstances and for the following reasons :
(1) The proposed amalgamation will pave the way for batter, more efficient and
economical control in the running of operation.
(2) Economies in administrative and management costs will improve in
combined profitability.
(3) The amalgamated company will have the benefit of the combined reserves,
manufacturing assets, manpower and cash flows of the two companies. The
combined technological, managerial and financial resources are expected to
enhance the capability of the amalgamated company to invest in larger and
sophisticated projects to ensure rapid growth.
(4) The amalgamated company will have a strong and large re source base.
With a strong resource base, the risk bearing capacity of the amalgamated
company will be substantial. Hitherto, with limited resources and capacity,
either company had to forego business opportunities which would otherwise
have been profitable to the group.
(5) "Exports" have been identified a 'thrust' area for both the companies and
response in time to customers needs is considered to be critical in this area of
operations. An amalgamated company will be strategically better placed to
reduce the response time. Customers' confidence in dealing with such a mega
company ensures timely delivery of large orders.
(6) The amalgamated company will be able to source and absorb new
technology and spend on Research and Development, Market Surveys etc. More
comprehensively.
(7) More particularly in the Textiles Division, with 5 operating units at the
company's disposal, the flexibility in operations will be very much pronounced.
The Managers will not be inhibited by capacity constraints and will have the
freedom of choosing from various options.
(8) Both the companies have been subject to the pressures of raw material
price fluctuations and of adverse market conditions in their respective product
mix. Hence, the amalgamation will neutralise the adverse effects of contrary
business cycles. The operations of one unit will be complementary to the other
and a stable profitability will be achieved.
9. The director of the respondent-company MIL and transferor-company MFL approved
the proposal for amalgamation of the MFL with MIL and pursuant to the respective
Resolutions passed by them the detailed Scheme of Amalgamation was finalised. The
directors of both the companies of the opinion that such amalgamation was in the
interest do both the companies.
1 0 . It is pertinent to note at this stage that the appellant who has objected to the
amalgamation before the High Court in the present proceedings so far as the
amalgamation of the transferee-company is concerned, is himself one of the directors of
the transferor-company being MFL. So far as the transferor-company MFL is concerned

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 as its registered office is located at Bombay the corresponding application on behalf of
the transferor-company for sanctioning this very Scheme of Amalgamation was moved
in the Bombay High Court. The appellant at this stage did not object to this very
Scheme for amalgamation on behalf of the transferor-company of which he was one of
the directors and party to the Resolution approving the said amalgamation. Learned
Single Judge of the Bombay High Court sanctioned the said Scheme on behalf of
transferor-company. It is not in dispute between the parties that Bombay High Court
had already sanctioned this very Scheme on behalf of the transferor-company.
1 1 . As the registered office of the transferee-company is located at Ahmedabad the
respondent transferee-company had approached the High Court of Gujarat for
sanctioning this very Scheme of Amalgamation on behalf of the transferee-company and
that application was moved on 8th February 1994. It is at this stage that the appellant
who was one of the shareholders of the transferee-company filed his objection to the
Scheme of Amalgamation moved under Section 391 of the Act. Earlier the learned
Single Judge directed convening of meeting of equity shareholders of the respondent-
company. In the meeting of equity shareholders convened pursuant to the order of the
High Court, overwhelming majority of the equity shareholders approved the Scheme in
the meeting of 22nd January 1994 convened at Premabhai Hall, Bhadra, Ahmedabad.
The said meeting was attended by 5522 members present in person or by proxy,
holding 20, 48, 513 fully paid equity shares of Rs. 100 each aggregating to Rs.
20,48,51,300. At the said meeting, resolution was passed without modification by the
requisite majority as 5298 members holding 19, 36, 964 fully paid equity shares voted
in favour of the Scheme and 143 members holding 86, 061 fully paid equity shares
voted against the Scheme. In short, the said meeting by requisite majority approved the
proposed Scheme of Amalgamation and report of the Chairman was submitted to the
High Court. Thereafter the respondent-company MIL filed Company Petition No. 22 of
1994 under Section 391(2) of the Act. That application was ordered to be published in
local newspapers as well as in the Bombay edition of the said newspaper. Notice was
also issued to Regional Director, Company Law Board, Western Region, Bombay.
12. In response to the notice issued to the Central Government under Section 394A of
the Act the learned Additional Central Government Standing Counsel appeared before
the High Court and submitted to the orders of the Court making it clear that the Central
Government is not to make any representation in favour or against the proposed
Scheme.
13. Pursuant to the public advertisement only the present appellant, the shareholder of
transferee-company holding 40, 567 share in MIL filed affidavit opposing the Scheme of
Amalgamation and Arrangement between the respondent transferee-company MIL and
transferor-company MFL of which, as noted earlier, he himself was one of the directors
and the High Court of Bombay which sanctioned this very Scheme on behalf of the
transferor-company had sanctioned the Scheme without any objection being taken by
the appellant at that stage.
1 4 . Nine objections were raised by the appellant against the proposed Scheme of
Amalgamation as shareholder of the transferee-company. At this stage we may not
mention all these nine objections as ultimately only four objections have survived for
our consideration in the present proceedings and to which we will make a detailed
reference hereinafter. Suffice it to state at this stage that after a prolonged hearing the
learned Single Judge S.D. Shah, J., over-ruled these objections and by a detailed as
exhaustive judgment running over 254 pages covering various aspects of the matters
canvassed before him sanctioned the said Scheme moved on behalf of the respondent

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 transferee-company.
15. The Division Bench of the High Court to which the appellant carried the matter in
appeal confirmed the aforesaid decision of the learned Single Judge by well considered
Judgment which also ran into 136 pages and that is how the appellant, original
objector, is before us in this appeal.
Family History
16. In order to properly appreciate the grievance of the appellant against the proposed
Scheme and his role as an objector it will be necessary to note the family history of the
appellant and two of the directors of the respondent transferee-company who have a
common ancestor Mafatlal Gagalbhai. The Family Tree of Mafatlal Gagalbhai projects the
following picture :

As the aforesaid Family Tree shows, the appellant Miheer is the son of cousin brother of
Arvind Navinchandra who is said to be at the helm of affairs of the transferee-company
along with his son Hrishikesh. As seen from the Family Tree the common ancestor
Mafatlal Gagalbhai who was himself a very astute businessman and entrepreneur had
three sons Pransukhlal. Navinchandra and Bhagubhai. The eldest son Pransukhlal got
out of the family prior to the death of Mafatlal Gagalbhai and he died without leaving
any issue. Mafatlal Gagalbhai expired on 19th July 1944 and was survived by his two
sons Navinchandra and Bhagubhai. On 30th September 1944, the said Bhagubhai died
leaving him surviving Hemant, then aged 9 as his only male issue. On 31st August
1955, Navinchandra Mafatlal died leaving him surviving the three sons. Arvind Mafatlal.
Yogindra Mafatlal and Rasesh mafatlal as his male issues. On 16th August 1971, said
Hemant expired leaving behind him only male issue, present objector Miheer, them
aged 13.
1 7 . The said Mafatlal Gagalbhai started different business undertakings and with
passage of time, the family of said Mafatlal consisting to Navinchandra and Bhagubhai
expanded their business undertakings. The said family held controlling interest in
different business concerns run through public limited or private limited companies and
the members of the family were also partners in partnership firms. The pattern which
was maintained throughout was that the two sons Navinchandra and Bhagubhai and
their families would respectively have an equal interest in companies or in partnership
firms. At the time of the death of the said Bhagubhai the said Hemant was just 9 years
of age. The business of Mafatlal Group was therefore for all practical purposes managed
by the said Navinchandra. At the time to the death of Navinchandra the shareholding of
the branch of Hemant Mafatlal in Mafatlal Group of Industries was equal to aggregate

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 shareholding of Arvind Mafatlal, Yogindra Mafatlal and Rasesh Mafatlal. On the death of
Navinchandra, the Mafatlal Group was managed by Arvind Mafatlal, Yogindra Mafatlal,
Rasesh Mafatlal and late Hemant Mafatlal. Arvind Mafatlal was, however the eldest male
member in the family who was always looked upon by Yogindra, Rasesh and late
Hemant as an elder in the family and respected.
18. On 16th August 1971, Hemant Mafatlal died at the young age of 36 years leaving
behind him his widowed mother, his wife, his son Miheer (then aged 13) and his two
daughters (then aged 11 and 6). At that time, the Mafatlal family, i.e., the families of
Navinchandra and Bhagubhai were running 3 apex companies (1) Mafatlal Gagalbhai &
Company Private Limited, (2) Surat Cotton Spinning and Weaving Mills Private Limited
and (3) Pransukhlal & Company Private Limited.
19. It is the case of Miheer that when his father expired, the New Shorrock Spinning
and Manufacturing Co. Limited was being controlled and managed by Mafatlal Gagalbhai
& Co. Limited in which his father and his family had 46.47% shares vis-a-vis 43.66%
shares held by the family of Navinchandra Mafatlal. After the death of his father, when
Miheer was minor, it was decided to amalgamate Mafatlal Gagalbhai & Co. Pvt. Limited
with the New Shorrock Spinning & Manufacturing Co. Limited on 24th January 1974
January 1974 and the name of the company was changed to present name i.e. MIL.
20. According to the appellant Miheer in or around 1979, there were certain disputes
and difference amongst Arvind Mafatlal, Yogindra Mafatlal and Rasesh Mafatlal and it
was felt that some arrangement should be worked put, whereby there would be a
separation and division of the family business concerns amongst the four branches viz.
Miheer Branch known as MHM Group, family of Arvind Mafatlal known as ANM Group,
family of Yogindra Mafatlal known as YNM Group and family of Rasesh Mafatlal known
as RNM Group. It is his further case that Shri C.C. Chokshi, a reputed chartered
accountant was requested to prepare a Scheme for division of family business concerns.
According to the appellant. Shri C.C. Chokshi prepared Note dated 23rd February 1979
making six suggestions for the division of Mafatlal Group of Industries into four groups
as there were four family groups. The appellant contends that as per the aforesaid
family arrangement the transferee-company, i.e., MIL was agreed to be put to his share
and the other groups which were holding shares in the said transferee-company were to
transfer their share-holdings in favour of the appellant. The appellant contends that
however because of some family disputes the appellant fell from the grace of Shri
Arvind Mafatlal who was the eldest male member monitoring all these industries
belonging to all the groups of the same family, and consequently the family
arrangement was not give effect to and that the transferee-company was not handed
over in management to the appellant.
21. On the other hand the case of the other group headed by Shri Arvind Mafatlal was
to the effect that the said family arrangement of 1979 was given a go-by and the
appellant himself agreed to sell his share-holding in the transferee-company MIL in
favour of Arvind Mafatlal's Group. Number of litigations took place between the parties
in the second half of 1980s. That on 6th April 1987 Arvind Mafatlal filed Suit No. 10 of
1987 in the High Court of Judicature at Bombay for a declaration that there was a valid,
subsisting and binding contract to sell shares held by Rasesh Mafatlal, Yogindra Mafatlal
and Miheer Mafatlal, the appellant herein, groups to Shri Arvind Mafatlals group and for
a direction that they should sell that shares at a price to be determined by the
arbitrator. In the said suit the appellant Miheer filed a counter-claim praying that the
family arrangement of 1979 should should be enforced and the share-holding of Shri
Arvind Mafatlal's group and other groups in the transferee company MIL should be sold

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 by way of specific performance to the appellant. The aforesaid suit by Arvind Mafatlal
and the counterclaim by the appellant are pending for adjudication in the High Court of
Judicature at Bombay. It is in the background of the aforesaid history of family feud
between these warring groups descended from the common ancestor Shri Mafatlal
Gagalbhai that the grievance voiced by the appellant in these proceedings has to be
appreciated.
Rival Contentions
22. As noted earlier though a battle royal was fought between the contesting parties
before the learned Single Judge wherein nine objections were raised for adjudication by
the appellant, at this stage, the dispute centered round a limited number of contentions
which were canvassed for our consideration by learned Senior Counsel for the
appellant. Four-fold submissions for opposing the Scheme were canvassed on behalf of
the appellant before us by Shri Shanti Bhushan, learned Senior Counsel. In the first
place he contended that the respondent-company while putting the Scheme for approval
of the equity shareholders in their meeting did not disclose the interest of the directors,
namely, Shri Arvind Mafatlal and Shri Hrishikesh Mafatlal belonging to the camp of
Arvind Mafatlal in the explanatory statement supporting the Scheme and consequently
the shareholders were misled and could not come to an informed decision regarding the
approval of the said Scheme with the result that the approval by the majority of equity
shareholders to the said Scheme has got vitiated; (2) The Scheme as proposed was
unfair to the minority shareholders represented by the appellant and consequently it
ought not to have been sanctioned by the Court; (3) The Scheme was otherwise unfair
to the equity shareholders as the exchange ratio of equity shares of the transferor and
transferee companies was ex facie unreasonable and unfair to the shareholders of the
transferee-company MIL in so far as it provides under the Scheme that two equity
shares of the transferee company will be allotted against five equity shares of the
transferor-company at their respective face value of Rs. 100 per share; and (4) That the
appellant represented a distinct class of equity shareholders so far as the respondent
transferee-company is concerned and consequently separate meeting so far as his group
is concerned should have been convened by the Company Court and as that has not
been done the Scheme is liable to be rejected.
2 3 . As a corollary to the aforesaid contention Shri M.J. Thakore, learned Counsel
appearing for the appellant in addition submitted that the voting pattern as adopted in
the meeting of equity shareholders which had approved the Scheme by majority,
resulted in coercing the minority represented by the appellant and that has rendered the
Scheme unfair and unreasonable and consequently it is required to be rejected.
2 4 . On the other hand learned Senior Counsel Shri Sorabjee appearing for the
respondent transferee-company contended that there was to illegality either procedural
or substantive vitiating the Scheme and that there was no suppression of relevant
material from the shareholders when the Scheme was put to vote. That the personal
disputes between the warring groups of the family, namely, Arvind Mafatlal on the one
hand and the appellant on the other and which were subject-matter of the pending
litigation in Bombay High Court had nothing to do with the question of sanctioning the
Scheme for its better economic viability with which the shareholders were concerned
and that as the transferor-company and the transferee-company were juristic persons
and corporate bodies, while considering the question of approving the said Scheme
such personal disputes between the directors of the transferee-company and the
director of transferor-company were completely irrelevant and were out of consideration
of the equity shareholders who were not at all concerned with this type of internal feuds

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 and in any case non-disclosure of such disputes had no adverse effect on the decision
of the majority shareholders who had approved the Scheme with a thumping majority of
about 95% and the appellant who was objecting to the Scheme was in microscopic
minority of 5% of the total voting strength. It was also contended by learned Senior
Counsel for the respondent that it is wrong to assume that the transferee-company was
family concerned and was managed by families. That Shri Arvind Mafatlal and
Hrishikesh Mafatlal were only two directors out of thirteen directors of respondent-
company. These eleven directors did not belong to his family. That even shareholding of
Arvind Mafatlal's group in the respondent-company was not substantial and on the
contrary about 40% shares were held by outside financial institutions. Even otherwise
there was no question of any unfairness underlying the proposed Scheme or that in any
way it was unfair to the appellant who never cared even to remain present personally at
time of the meeting of the equity shareholders to put forward his objections and he only
sent proxies who had no right to speak at the meeting. That therefore all these
objections which he ultimately raised before the High Court were an afterthought. It was
also contended that there was nothing wrong with the exchange ration as C.C. Chokshi
& Co., a firm of reputed chartered accountants, had considered all the pros and cons
underlying the Scheme and had suggested the exchange ratio and such an expert
opinion was endorsed by another financial institution ICICI. That the appellant had not
chosen to controvert this expert opinion by leading any evidence in rebuttal by any
other expert in the field who could have suggested the exchange ratio differently. That
the appellant's contention that the exchange ratio should have been one share of
transferee company against six shares of the transferor company was in the realm of
mere conjecture and ipse dixit. It was not supported by any expert opinion.
Consequently the High Court was justified in taking the view both at the stage of
learned Single Judge as well as in appeal by the Division Bench that the exchange ratio
could not be said to be unfair or unreasonable especially when by as overwhelming
majority the equity shareholders approved the said Scheme along with said exchange
ratio and had no objection to the allotment of two equity shares of the transferee-
company in exchange for five equity shares of transferor-company. It was also
contended that the appellant himself who was the director of the transferor-company
had approved the same exchange ratio while he acted on behalf of the transferor-
company. He was, therefore, playing hide and seek when it came to the enforcement of
the very same exchange ratio at the end of the transferee-company wherein he was not
a director but only shareholder of merely 5% shares.
25. It was next contended that the appellant was also an equity shareholder and so far
as the other equity shareholders were concerned they constituted the same class as the
appellant. That there was no inter se conflict between the rest of the equity
shareholders representing 95% of the voting strength which approved the Scheme and
the appellant who represented dissenting 5% votes and consequently there was no
question of holding as separate meeting so far as the appellant was concerned. Even
otherwise such a separate meeting would not have made any impact on the voting
pattern projected by the equity shareholders approving the said Scheme by
overwhelming majority. Repelling the additional contention canvassed by learned
Counsel for the appellant it was submitted by Shri Sorabjee learned Senior Counsel for
the respondent that there was no question of coercing any minority by the majority as
in the meeting of the equity shareholders the appellant had not thought fit even to
remain present personally and had only got represented through proxy for submitting
his objection by voting against the Scheme without having any right to address the
meeting. Thus the contention regarding alleged suppression by the majority was purely
an afterthought especially when in the meeting the group of Arvind Mafatlal had not
represented an absolute majority and 40% of the voting was by financial institutions

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 who had no axe to grind against the appellant and who had voted by keeping in view
purely commercial and economic interests of equity shareholders and had approved the
Scheme in that light. It was, therefore, submitted that the contention raised on behalf of
the appellant deserve to be rejected and the appeal consequently also deserve to be
dismissed.
2 6 . In view of the aforesaid rival contentions the following points arise for our
determination :
1. Whether the respondent-company was guilty of hiding the special interest of
its director Shri Arvind Mafatlal from the shareholders while circulating the
explanatory statement supporting the Scheme and whether thereby the voting
by the equity shareholders got vitiated.
2. Whether the Scheme is unfair and unreasonable to the minority shareholders
represented by the appellant.
3. Whether the proposed Scheme of Amalgamation was unfair and amounted to
suppression of minority shareholders represented by the appellant and hence
liable to be rejected.
4 . Whether separate meeting of minority shareholders represented by the
appellant was required to be convened on the basis that the appellant's group
represented a special class of equity shareholders.
5. Whether the exchange ratio of two equity shares of MIL for five equity shares
of MFL was ex facie unfair and unreasonable to the equity shareholders of MIL
and consequently the Scheme of Amalgamation on that account was liable to be
rejected.
27. However before we deal with the aforesaid points for determination seriatim, it will
be necessary to keep in view the limited scope of the jurisdiction of the Company Court
which is called upon to sanction the Scheme of Amalgamation as per the provisions of
Section 391 read with Section 393 of the Act.
Scope of interference by the Company
Court in sanction proceedings
28. The relevant provisions of the Companies Act, 1956 are found in Chapter V of Part
VI dealing with 'Arbitration, Compromises, Arrangements and Reconstructions'. In the
present proceedings we will be concerned with Sections 391 and 393 of the Act. The
relevant provisions thereof read as under :
391. (1) Where a compromise or arrangement is proposed -
(a) between a company and its creditors or any class of them; or
(b) between a company and its members or any class of them;
the Court may, on the application of the company, or, of any creditor or
member of the company, or, in the case of a company which is being wound
up, of the liquidator, order a meeting of the creditors or class of creditors, or of
the members or class of members, as the case may be, to be called, held and
conducted in such manner as the Court directs.

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 (2) If a majority in number representing three-fourths in value of the creditors,
or class of creditors, or members, or class of members, as the case may be,
present and voting either in person or, where proxies are allowed under the
rules made under Section 643, by proxy, at the meeting, agree to any
compromise or arrangement, the compromise or arrangement shall, if
sanctioned by the Court, be binding on all the creditors, all the creditors of the
class, all the members, or all the members of the class, as the case may be,
and also on the company, or, in the case of a company which is being wound
up, on the liquidator and contributories of the company :
Provided that no order sanctioning any compromise or arrangement
shall be made by the Court unless the Court is satisfied that the
company or any other person by whom an application has been made
under Sub-section (1) has disclosed to the Court, by affidavit or
otherwise, all material facts relating to the company, such as the latest
financial position of the company, the latest auditor's report on the
accounts of the company, the pendency of any investigation
proceedings in relation to the company under Sections 235 to 251, and
the like.
393. (1) Where a meeting of creditors or any class of creditors, or of members
or any class of members, is called under Section 391,-
(a) with every notice calling the meeting which is sent to a creditor or
member, there shall be sent also a statement setting forth the terms of
the compromise or arrangement and explaining its effect : and in
particular, stating any material interests of the directors, managing
director, managing agent, secretaries and treasurers or manager of the
company, whether in their capacity as such or as members or creditors
of the company or otherwise, and the effect on those interests, of the
compromise or arrangement, if, and in so far as, it is different from the
effect on the like interests of other persons; and
(b) in every notice calling the meeting which is given by advertisement,
there shall be included either such a statement as aforesaid on a
notification of the place at which and the manner in which creditors or
members entitled to attend the meeting may obtain copies of such a
statement as aforesaid.
The aforesaid provisions of the Act show that compromise or arrangement can be
proposed between a company and its creditors or any class of them or between a
company and its members or any class of them. Such a compromise would also take in
its sweep any scheme of amalgamation/merger of one company with another. When
such a scheme is put forward by a company for the sanction of the Court in the first
instance the Court has to direct holding of meetings of creditors or class of creditors or
members or class of members who are concerned with such a scheme and once the
majority in number representing three-fourths in value of creditors or class of creditors
or members or class of members, as the case may be, present or voting either in person
or by proxy at such a meeting accord their approval to any compromise or arrangement
thus put to vote, and once such compromise is sanctioned by the Court, it would be
binding to all creditors or class of creditors or members or class of members, as the
case may be, which would also necessarily mean that even to dissenting creditors or
class of creditors or dissenting members or class of members such sanctioned scheme

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 would remain binding. Before sanctioning such a scheme even though approved by a
majority of the concerned creditors or members the Court has to be satisfied that the
company or any other person moving such an application for sanction under Sub-
section (2) of Section 391 has disclosed all the relevant matters mentioned in the
proviso to Sub-section (2) of that Section. So far as the meetings of the creditors or
members, or their respective classes for whom the Scheme is proposed are concerned,
it is enjoined by Section 391(1)(a) that the requisite information as contemplated by
the said provision is also required to be placed for consideration of the concerned
voters so that the parties concerned before whom the scheme is placed for voting can
take an informed and objective decision whether to vote for the scheme or against it.
On a conjoint reading of the relevant provisions of Sections 391 and 393 it becomes at
once clear that the Company Court which is called upon to sanction such a scheme has
not merely to by go by the ipse dixit of the majority of the shareholders or creditors or
their respective classes who might have voted in favour of the scheme by requisite
majority but the Court has to consider the pros and cons of the scheme with a view to
finding out whether the scheme is fair, just and reasonable and is not contrary to any
provisions of law and it does not violate any public policy. This is implicit in the very
concept of compromise or arrangement which is required to receive the imprimatur of a
court of law. No court of law would ever countenance any scheme of compromise or
arrangement arrived at between the parties and which might be supported by the
requisite majority if the Court finds that it is an unconscionable or an illegal scheme or
is otherwise unfair or unjust to the class of shareholder or creditors for whom it is
meant. Consequently it cannot be said that a Company Court before whom an
application is moved for sanctioning such a scheme which might have got the requisite
majority support of the creditors or members or any class of them for whom the scheme
is mooted by the concerned company has to act merely as a rubber stamp and must
almost automatically put its seal of approval on such a scheme. It is trite to say that
once the scheme gets sanctioned by the Court it would bind even the dissenting
minority shareholders or creditors. Therefore, the fairness of the scheme qua them also
has to be kept in view by the Company Court while putting its seal of approval on the
concerned scheme placed for its sanction.
It is, of course, true that so far as the Company Court is concerned as per the statutory
provisions of Sections 391 and 393 of the Act the question of voidability of the scheme
will have to be judged subject to the rider that a scheme sanctioned by majority will
remain binding to a dissenting minority of creditors or members, as the case may be,
even though they have not consented to such a scheme and to that extent absence of
their consent will have no effect on the scheme. It can be postulated that even in case
of such a Scheme of Compromise and Arrangement put up for sanction of a Company
Court it will have to be seen whether the proposed scheme is lawful and just and fair to
the whole class of creditors or members including the dissenting minority to whom it is
offered for approval and which has been approved by such class of persons with
required majority vote.
28-A. However further question remains whether the Court has jurisdiction like an
appellate authority to minutely scrutinizes the scheme and to arrive at an independent
conclusion whether the scheme should be permitted to go through or not when the
majority of the creditors or members or their respective classes have approved the
scheme as required by Section 391 Sub-section (2). On this aspect the nature of
compromise or arrangement between the company and the creditors and members has
to be kept in view. It is the commercial wisdom of the parties to the scheme who have
taken and informed decision about the usefulness and propriety of the scheme by
supporting it by the requisite majority vote that has to be kept in view by the Court. The

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 Court certainly would not act as a court of appeal and sit in judgment over the informed
view of the concerned parties to the compromise as the same would be in the realm of
corporate and commercial wisdom of the concerned parties. The Court has neither the
expertise nor the jurisdiction to delve deep into the commercial wisdom exercised by
the creditors and members of the company who have ratified the Scheme by the
requisite majority. Consequently the Company Court's jurisdiction to that extent is
peripheral and supervisory and not appellate. The Court acts like an umpire in a game
of cricket who has to see that both the teams play their game according to the rules and
do not overstep the limits. But subject to that how best the game is to be played is left
to the players and not to the umpire.
The supervisory jurisdiction of the Company Court can also be culled out from the
provisions of Section 392 of the Act which reads as under :
392. (1) Where a High Court makes an order under Section 391 sanctioning a
compromise or an arrangement in respect of a company, it -
(a) shall have power to supervise the carrying out of the compromise
or arrangement; and
(b) may, at the time of making such order or at any time thereafter,
give such directions in regard to any matter or make such modifications
in the compromise or arrangement as it may consider necessary for the
proper working of the compromise or arrangement.
(2) If the Court aforesaid is satisfied that a compromise or arrangement
sanctioned under Section 391 cannot be worked satisfactorily with or without
modifications, it may, either on its own motion or on the application of any
person interested in the affairs of the company, make an order winding up the
company, and such an order shall be deemed to be an order made under
Section 433 of this Act.
(3) The provisions of this section shall, so far as may be, also apply to a
company in respect of which an order has been made before the
commencement of this Act under Section 153 of the Indian Companies Act,
1913 (7 of 1913), sanctioning a compromise or an arrangement.
Of course this Section deals with post-sanction supervision. But the said provision itself
clearly earmarks the filed in which the sanction of the Court operates. It is obvious that
the supervisor cannot ever be treated as the author or a policy maker. Consequently the
propriety and the merits of the compromise or arrangement have to be judged by the
parties who as sui juris with their open eye and fully informed about the pros and cons
of the Scheme arrive at their own reasoned judgment and agree to be bound by such
compromise or arrangement. The Court cannot, therefore, undertake the exercise of
scrutinising the scheme place for its sanction which a view to finding out whether a
better scheme could have been adopted by the parties. This exercise remains only for
the parties and is in the realm of commercial democracy permeating the activities of the
concerned creditors and members of the company who in the their best commercial and
economic interest by majority agree to give green single to such a compromise or
arrangement. The aforesaid statutory scheme which is clearly discernible from the
relevant provisions of the Act, as seen above, has been subjected to a series of
decisions of different High Courts and this Court as well as by the courts in England
which had also occasion to consider schemes under pan materia English Company Law.
We will briefly refer to the relevant decisions on the point. But before we do so we may

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 also usefully refer to the observations found in the oft-quoted passage in Bucklay on the
Companies Act, 14th Edition. They are as under :
In exercising its power of sanction the Court will see, first that the provisions of
the statute have been complied with, second, that the class was fairly
represented by those who attended the meeting and that statutory majority are
acting bona fide and are not coercing the minority in order to promote interest
adverse to those of the class whom they purport to represent, and thirdly, that
the arrangement is such as an intelligent and honest man, a member of the
class concerned and acting in respect of his interest, might reasonably approve.
The court does not sit merely to see that the majority are acting bona fide and
thereupon to register the decision of the meeting, but at the same time, the
court will be slow to differ from the meeting, unless either the class has not
been properly consulted, or the meeting has not considered the matter with a
view to the interest of the class which it is empowered to bind, or some blot is
found in the Scheme.
In the case of Re. Alabama, New Orleans Texas and Pacific junction Railway Company
reported in 1891 (1) C D 213 the relevant observations regarding the power and
jurisdiction of the Company Court which is called upon to sanction a scheme of
arrangement or compromise between the company and its creditor or shareholders were
made by Lindley, L.J. as under :
What the court has to do is to see, first of all, that the provisions of that statute
have been complied with; and, secondly, that the minority has been acting
bona fide. The court also has to see that the minority is not being overridden by
a majority having interests of its own clashing with those of the minority whom
they seek to coerce. Further than that, the court has to look at the scheme and
see whether it is one as to which persons acting honestly, and viewing the
scheme laid before them in the interests of those whom they represent, take a
view which can reasonable be taken by businessmen. The court must look at
the scheme, and see whether the Act has been complied with, whether the
majority are acting bona fide, and whether they are coercing the minority in
order to promote interests adverse to those of the class whom they purport to
represent; and then see whether the scheme is a reasonable one or whether
there is any reasonable objection to it, or such an objection to it as that any
reasonable man might say that he could not approve it.
To the similar effect were the observations of Fry, L.J., which read as under :
The next enquiry is-Under what circumstances is the court to sanction a
resolution which has been passed approving of a compromise or arrangement?
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 complied
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.
In Anglo-Continental Supply Co. Ltd., Re. (1992) 2 Ch. 723 Ashtury, J., a century later

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 reiterated the very same propositions as under :
Before giving its sanction to a scheme of arrangement the court will see firstly
that the provisions of the statute have been complied with; secondly that the
class was fairly represented by those who attended the meeting and that the
statutory majority are acting bona fide and are not coercing the minority in
order to promote interests adverse to those of the class whom they purport to
represent; and, thirdly, that the arrangement is such as a man of business
would reasonably approve.
Learned Single Judge of the Calcutta High Court in the case of Re. Mankam Investments
Ltd. and Ors. (1995) 4 Comp L J 330 relying on a catena of decisions of the English
Courts and Indian High Courts observed as under on the power and jurisdiction of the
Company Court which is called upon to sanction a scheme of merger and amalgamation
of companies :
It is a matter for the shareholders to consider commercially whether
amalgamation or merger is beneficial or not. The court is really not concerned
with the commercial decision of the shareholders until and unless the court
feels that the proposed merger is manifestly unfair or is being proposed unfairly
and/or to defraud the other shareholders. Whether the merged companies will
be ultimately benefited or will be able to economies in the matter of expenses
is a matter for the shareholders to consider. If three companies are
amalgamated, certainly, there will be some economies in the matter of
maintaining accounts, filing of returns and various other matters. However, the
court is really not concerned with the exact details of the matter and if the
shareholders approved the scheme by the requisite majority, then the court
only looks into the scheme as to find out that it is not manifestly unfair and/or
is not intended to defraud or do injustice to the other shareholders.
We may also in this connection profitably refer to the judgment of this Court in the case
of Hindustan Lever Employee's Union v. Hindustan Lever Ltd. and Ors.
MANU/SC/0101/1995 : AIR1995SC470 wherein a Bench of three learned judges
speaking through Sen, J. on behalf of himself and Venkatachaliah, CJ., and with which
decision Sahai, J., concurred. Sahai, J., in his concurring judgment in the aforesaid case
has made the following pertinent observations in this connection in paras 3 and 6 of the
Report :
But what was lost sight of was that the jurisdiction of the Court in sanctioning a
claim of merger is not to ascertain with mathematical accuracy if the
determination satisfied the arithmetical test. A company court does not exercise
an appellate jurisdiction....
Section 394 casts an obligation on the court to be satisfied that the scheme for
amalgamation or merger was not contrary to public interest. The basic principle
of such satisfaction is none other than the broad and general principles inherent
in any compromise or settlement entered between parties that it should not be
unfair or contrary to public policy or unconscionable. In amalgamation of
companies, the courts have evolved, the principle "prudent business
management test" or that the scheme should not be a device to evade law. But
when the court is concerned with a scheme of merger with a subsidiary of a
foreign company then test is not only whether the scheme shall result in
maximizing profits of the shareholders or whether the interest of employees

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 was protected but it has to ensure that merger shall not result in impeding
promotion of industry or shall obstruct growth of national economy. Liberalised
economic policy is to achieve this goal. The merger, therefore, should not be
contrary to this objective. Reliance on English decisions Home & Co. Ltd., Re
1933 All ER Rep 105, Ch D and Bugle Press Ltd. Re. 1961 Ch 270 that the
power of the court is to be satisfied only whether the provisions of the Act have
been complied with or that the class or classes were fully represented and the
arrangement was such as a man of business would reasonably approve between
two private companies may be correct and may normally be adhered to but
when the merger is with a subsidiary of a foreign company then economic
interest of the country may have to be given precedence. The jurisdiction of the
court in this regard is comprehensive.
Sen, J., speaking for himself and Venkatachaliah, CJ., also towed the line indicated by
Sahai, J., about the jurisdiction of the Company Court while sanctioning the scheme and
made the following pertinent observations in paragraph 84 at page 528 of the Report :
An argument was also made that as a result of the amalgamation, a large share
of the market will be captured by HLL. But there is nothing unlawful or illegal
about this. The Court will decline to sanction a scheme of merger, if any tax
fraud or any other illegality is involved. But that is not the case here. A
company may, on its own, grow up to capture a large share of the market. But
unless it is shown that there is some illegality or fraud involved in the scheme,
the Court cannot decline to sanction a scheme of amalgamation. It has to be
borne in mind that this proposal of amalgamation arose out of a sharp decline
in the business of TOMCO. Dr. Dhavan has argued that TOMCO is not yet a sick
Company. That may be right, but TOMCO at this rate will become a sick
Company, unless something can be done to improve its performance. In the last
two years, it has sold its investments and other properties. If this proposal of
amalgamation is not sanctioned, the consequence for TOMCO may be very
serious. The shareholders, the employees, the creditors will all suffer. The
argument that the Company has large assets is really meaningless. Very many
cotton mills and jute mills in India have become sick and are on the verge of
liquidation, even though they have large assets. The Scheme has been
sanctioned almost unanimously by the shareholders, debenture-holders,
secured creditors, unsecured creditors and preference shareholders of both the
Companies. There must exist very strong reasons for withholding sanction to
such a scheme. Withholding of sanction may turn out to be disastrous for
60,000 shareholders of TOMCO and also a large number of its employees.
In view of the aforesaid settled legal position, therefore, the scope and ambit of the
jurisdiction of the Company Court has clearly got earmarked. The following broad
contours of such jurisdiction have emerged :
1. The sanctioning court has to see to it that all the requisite statutory
procedure for supporting such a scheme has been complied with and that the
requisite meetings as contemplated by Section 391(1)(a) have been held.
2 . That the scheme put up for sanction of the Court is backed up by the
requisite majority vote as required by Section 391 Sub-Section (2).
3 . That the concerned meetings of the creditors or members or any class of
them had the relevant material to enable the voters to arrive at an informed

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 decision for approving the scheme in question. That the majority decision of the
concerned class of voters is just and fair to the class as a whole so as to
legitimately bind even the dissenting members of that class.
4 . That all necessary material indicated by Section 393(1)(a) is placed before
the voters at the concerned meetings as contemplated by Section 391 Sub-
section (1).
5 . That all the requisite material contemplated by the proviso of Sub-section
(2) of Section 391 of the Act is placed before the Court by the concerned
applicant seeking sanction for such a scheme and the Court gets satisfied about
the same.
6 . That the proposed scheme of compromise and arrangement is not found to
be violative of any provision of law and is not contrary to public policy. For
ascertaining the real purpose underlying the Scheme with a view to be satisfied
on this aspect, the Court, if necessary, can pierce the veil of apparent corporate
purpose underlying the scheme and can judiciously X-ray the same.
7 . That the Company Court has also to satisfy itself that members or class of
members or creditors or class of creditors, as the case may be, were acting
bona fide and in good faith and were not coercing the minority in order to
promote any interest adverse to that of the latter comprising of the same class
whom they purported to represent.
8 . That the scheme as a whole is also found to be just, fair and reasonable
from the point of view of prudent men of business taking a commercial decision
beneficial to the class represented by them for whom the scheme is meant.
9. Once the aforesaid broad parameters about the requirements of a scheme for
getting sanction of the Court are found to have been met, the Court will have
no further jurisdiction to sit in appeal over the commercial wisdom of the
majority of the class of persons who with their open eyes have given their
approval to the scheme even if in the view of the Court there would be a better
scheme for the company and its members or creditors for whom the scheme is
framed. The Court cannot refuse to sanction such a scheme on that ground as it
would otherwise amount to the Court exercising appellate jurisdiction over the
scheme rather than its supervisory jurisdiction.
The aforesaid parameters of the scope and ambit of the jurisdiction of the Company
Court which is called upon to sanction a Scheme of Compromise and Arrangement are
not exhaustive but only broadly illustrative of the contours of the courts jurisdiction.
29. In the light of the aforesaid settled legal position we will now proceed to deal with
the main points for determination indicated hereinabove.
Point No. 1
30. So for as this point is concerned it was vehemently contended by learned Senior
Counsel Shri Shanti Bhushan that the explanatory statement placed for consideration of
the meeting of equity shareholders was not a complete statement and relevant material
indicating the interest of the director of MIL Shri Arvind Mafatlal was not placed before
the voters with the result that the majority vote supporting the scheme got vitiated. The
explanatory statement which came to be circulated to the voters, namely, the equity

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 shareholders of the transferee-company MIL alleged as under :
It is proposed to amalgamate MF with MIL so as to enable the carrying on of
the combined business more economically and advantageously. Amalgamation
of both the companies would lead to substantial benefits in view of synergy of
operations. The amalgamation of both the companies would give improved
capital structure which would lend better flexibility in capital gearing which
would enable the amalgamated company to raise required finance at better
terms. A larger company would generate more confidence in the investors and
with the persons dealing with the company and will afford access to resources
easily and at lower costs. The amalgamation of M.F. with MIL will pave the way
for better, more efficient and economic control in the running operations and
would lead to economy in the administrative and management cost, resulting in
improving profitability. The amalgamated company will have a strong and large
resource funds. The combined Technological Managerial and financial resources
would enhance the capability of the amalgamated company to invest in larger
and sophisticated projects to ensure rapid growth. The amalgamated company's
Textiles Division with five operative units at its disposal will have flexibility in
its operation.
So far as the aforesaid explanatory statement is concerned it gives sufficient indication
regarding the pliability and usefulness of the proposed Scheme of Amalgamation of
transferor-company MFL with the transferee-company MIL. However the special
grievance of the appellant voiced by his learned Counsel is to the effect that the real
interest underlying the scheme of merger was that of the director Shri Arvind Mafatlal
and his group who were at the helm of affairs of the transferee-company. learned
Senior Counsel Shri Shanti Bhushan in this connection submitted that under Section
393(1)(a) of the Act the company is enjoined to mention in the statement material
interest of the director Shri Arvind Mafatlal in the Scheme which is of a special nature
as compared to the interest of other shareholders and it was also necessary to mention
the effect of the compromise and arrangement on such special interest of Shri Arvind
Mafatlal and as that was not mentioned in the explanatory statement along with which
the copy of the Scheme was circulated to the members the majority vote became
vitiated. Now a mere look at Section 393(1)(a) shows that the special interest of the
director which is required to be brought home to the voters must satisfy the following
requirements of the Section before it can be treated to be a relevant special interest of
the director which is required to be communicated to the voters :
1. The director's interest must be a special interest different from the interest of
other members who are the voters at the meeting.
2. The compromise or arrangement which is put to vote must have an effect on
such special interest of the director.
3 . Such effect must be different from the effect of compromise and
arrangement on similar interest of other persons who are called upon to vote at
the meeting.
When we enquired of Shri Shanti Bhushan, learned Senior Counsel for the appellant as
to which special interest, according to him, of director Arvind Mafatlal was required to
be communicated to the voters as per Section 393(1)(a), he stated that there was a
pending litigation between the appellant on the one hand Shri Arvind Mafatlal on the
other in Bombay High Court. That Shri Arvind Mafatlal had sought a declaration in a

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 pending suit against the appellant that the latter was required to sell off his share-
holding in the transferee-company MIL to the plaintiff Arvind Mafatlal who was director
of MIL. In this very suit the appellant had filed a counter-claim to the effect that Shri
Arvind Mafatlal and his group was required to transfer their share-holding in the
transferee-company in favour of the appellant as per the Family Arrangement of 1979.
Shri Shanti Bhushan in this connection submitted that though the learned Single Judge
had taken the view that this type of special interest of director Arvind mafatlal was not
relevant and germane to the requirement of Section 393(1)(a), the Division Bench in
appeal had taken a contrary view and held that such a special interest was required to
be communicated to the equity shareholders in their meeting as per the said provision.
In this connection our attention was invited by Shri Shanti Bhushan to the observation
of the Division Bench of the High Court at page 325 of the paper book wherein the
Division Bench observed as under :
Mihir H. Mafatlal was to get exclusive control to MIL to the exclusion of Arvind
N. Mafatlal and his two brothers. Under the proposed family arrangement M.
Fine was to be hived off from MIL and the control and management of the M.
Fine was to be held by Arvind N. Mafatlal and that of MIL was to be handed
over to objector Mihir H. Mafatlal. This family arrangement has suffered rough
weather. Suit No. 1010 of 1987 was filed by Arvind N. Mafatlal against Mihir H.
Mafatlal and others before the Bombay High Court alleging that another
agreement subsequent to the said family arrangement has come into existence
under which Mihir H. Mafatlal and other brothers of Arvind had agreed to
transfer all their holdings in MIL to A.N. Mafatlal, drawing a curtain on the
family arrangement of 1979. Mihir H. Mafatlal has filed counter claim in that
suit claiming enforcement of family arrangement of 1979. The said dispute and
the outcome thereof will have direct effect on the respective interest of the
shares held by A.N. Mafatlal, Mihir H. Mafatlal and other members of the
Mafatlal family, and trusts under them.
He also invited our attention to the observations of the Division Bench at page 328 of
the paper book to the effect that having considered the rival contentions and closely
examined the scheme of Section 393, they were unable to sustain the conclusion that
the facts about the interests under the alleged family arrangements and the effect of
proposed arrangement for amalgamation on such interests were not required to be
disclosed under Section 393(1)(a).
31. In our view the aforesaid observations of the Division Bench are not quite apposite
in the light of the proposed Scheme of Compromise and arrangement which was sought
to be got sanctioned by the Court. On the other hand the learned Single Judge was
quite justified in taking the view that this type of interest which was of personal nature
so far as director Arvind Mafatlal on the one hand and appellant on the other hand were
concerned was not at all germane to the question relating to sanctioning of the Scheme
of Compromise and Arrangement with which the Court was concerned. It is obvious that
when a Scheme of Compromise and Arrangement which involves two companies,
namely the transferor-company and the transferee-company and their shareholders and
creditors is on the anvil of scrutiny before the sanctioning Court, the court has to see
that the interest of the class of creditors or shareholders to whom the Scheme is offered
for approval is any way likely to be affected by the suppression of special interest of the
director in connection with such a scheme which is on the anvil. Two independent
bodies which are represented by their shareholders or creditors as a class, as the case
may be, have to take commercial decisions strictly with a view to seeing that the
concerned Scheme of Compromise or Arrangement is beneficial to the shareholders or

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 creditors as a class vis-a-vis the company which is a corporate entity in so far as
company's relations with these class of creditors and shareholders are concerned. If the
special interest which the director has is in any way likely to be affected by the Scheme
and if non-disclosure of such an interest is likely to affect the voting pattern of the class
of creditors or shareholders who are called upon to vote on the scheme, then only such
special interest of the director is required to be communicated to the voters as per
Section 393(1)(a). We fail to appreciate how the personal family dispute between the
appellant on the one hand and Arvind Mafatlal, director of the transferee-company MIL
on the other regarding the right to hold shares in the company can have any linkage or
nexus with the Scheme of Amalgamation of these two companies which was put to vote
before the equity shareholders. It is easy to visualize that if the suit filed by Arvind
Mafatlal against the appellant succeeds and the appellant's counter-claim fails then all
that would happen is that the appellant will have to sell his share-holding which is only
5% in the transferee-company to the plaintiff Arvind Mafatlal. That has nothing to do
with the equity shareholders as a class which was called upon to decide whether the
scheme of merging the transferor-company MFL with the transferee-company was for
the benefit of the shareholders as a class. The equity shareholders of the transferee-
company had to : decide in their commercial wisdom whether it is worthwhile to have a
larger body of shareholders on account of the merger so that apart from the
shareholding of the transferee-company its objects would also get diversified and its
filed of operation would be enlarged with the prospect of hike in the dividend available
to these shareholders after the economic and industrial activities of both the companies
so amalgamated would get elongated and whether the value of their shares in such
consolidated companies were likely to get a boost in the stock market. This was the
commercial decision which the equity shareholders of the transferee-company had to
take. For taking this informed decision they were least concerned whether 5% share-
holding of appellant in the company remained or did not remain with him in future.
Consequently if Arvind MafatlaFs suit ultimately succeeded before the Bombay High
Court and the appellant lost in his counter-claim that would have no effect whatsoever
on the informed decision which the equity shareholders were called upon to take while
approving the scheme in question.
3 2 . Conversely if the appellant succeeded in his counter-claim and director Arvind
Mafatlal lost in his suit then all that would happen is that Arvind Mafatlal will have to
transfer his shareholding and share-holding of his group in favour of appellant so far as
the transferee-company is concerned. That future possibility would have no impact on
the decision making process which the equity shareholders of transferee-company had
to undertake at this stage while approving the Scheme. Consequently such an
eventuality was totally irrelevant for being brought to the notice of the equity
shareholders before whom the scheme was put to vote. While deciding whether
transferor-company should be merged with the transferee-company and the transferee-
company's economic and industrial activity should be permitted to be enlarged as a
result of such merger the equity shareholders were least concerned whether the
appellant would purchase in future the share of the present director Arvind Mafatlal or
vice versa. That was entirely their personal dispute which was still not adjudicated upon
and its decision one way or the other had no impact on the pattern of voting of the
equity shareholders of the respondent-company as a class of prudent businessmen and
investors so far as the Scheme was concerned. The Scheme of Compromise and
Arrangement which was put to vote was of such a nature that it had no impact or effect
on the personal interest of the director Arvind Mafatlal in connection with his present
share-holding in the transferee-company. Consequently it must be held that mention
about such an interest was outside the statutory requirements of Section 393(1)(a) as
rightly held by the learned Single Judge whose view was erroneously upset by the

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 Division Bench. However in any case we are in entire agreement with the subsequent
reasoning of the Division Bench for approving the decision of the learned Single Judge
on this aspect, namely, that such non-disclosure of interest had no impact on the voting
pattern adopted at the meeting by the equity shareholders who are called upon to
approve the scheme. It may also be noted in this connection that the resolution of the
equity shareholders approving the Scheme of Amalgamation was passed with
overwhelming majority by members including through proxies, present and voting. It
projected the following picture :

In favour Against Total

(i) No. of Members 5,298 143 5,441

(ii) No. of valid votes 19,36,964 86,061 20,23,025

From the pattern of voting it became apparent that out of 100% of the share capital
75.75 per cent in value participated of which 95.75 per cent voted in favour of the
proposed Scheme. Out of 95.75 per cent of the votes in value, a paltry 8.43 per cent
votes had been attributed to Arvind Mafatlal group consisting of individuals and trust.
39.45 per cent were the votes attributable to financial institutions which can be said to
have no interest other than their own interests as men of business in considering the
proposed Scheme. Over 23 per cent votes have been attributed to public limited
companies or private limited companies which held the shares of MIL and in which
Arvind Mafatlal was also alleged to have interests. Thus non-mentioning of the private
dispute between Arvind Mafatlal and objector in connection with the holding of shares
in the transferee-company had in fact no impact on the voting pattern of equity
shareholders including the financial institutions which had nothing to do with this
personal feud between the warring groups. Consequently the non-mentioning of the
pending dispute between the appellant on the one and Arvind Mafatlal on the other
which was pending adjudication in the Bombay High Court had in fact no impact
whatsoever on the result of the voting undertaken by the equity shareholders in their
class meeting. Thus the requisite statutory majority of votes approving the scheme
could not have been adversely affected by the non-mentioning of this pending litigation
in the explanatory note even assuming that the Division Bench was right in holding that
it was required to be informed to the voters as per the requirements of Section 393(1)
(a). In either view of the matter, therefore, the non-mentioning of the pending litigation
between the director of the transferee-company Arvind Mafatlal on the one hand and the
appellant on the other, had no vitiating effect on the majority decision of the equity
shareholders who approved the Scheme with overwhelming majority of 95.75 per cent
of votes and when the dissenting vote on behalf of the appellant's group was in
microscopic minority of less than 5%. It is also pertinent to note in this connection that
appellant who being a party to the civil litigation before the Bombay High Court and
who was very much keep to get more shareholding in transferee-company and who had
already filed his counter-claim for enforcing the family arrangement of 1979, had not
thought it fit to remain present in the meeting of equity shareholders and on the
contrary he got himself represented through proxy who had no night to speak. Thus in
substance the appellant himself never though that information about the pendency of
the litigation between Arvind Mafatlal, director or the respondent-company and himself
was so important that it was required to be brought to the voters' notice even though he
had opportunity to do so by remaining personally present in the meeting for that
purpose. It, therefore, clearly appears to be an afterthought when he put forward such

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 an objection for the sake of it at the time of opposing the Scheme which was put for
sanction of the Court.
33. It may also be kept in view that the explanatory statement no way emphasised that
it is the management of the transferee-company by Shri Arvind Mafatlal which is going
to be better monitored and managed by him after the merger in question. In other
words management of the company is not at all a germane consideration for the
Scheme. Consequently whether the management remains with Arvind Mafatlal or in
future may met get changed and go in the hands of the appellant is not a consideration
which has any linkage or nexus with the Scheme. Consequently the interest of Arvind
Mafatlal in the share-holding or likely future impact thereon by the litigation was de
hors the Scheme in question and was not required to be placed before the voters. The
first point for determination is, therefore, answered in the negative.
Point No. 2
34. So far as this point is concerned Shri Shanti Bhushan, learned Senior Counsel for
the appellant, submitted that in modern days corporate bodies even though public
limited companies are mostly controlled by big, influential and economically powerful
families, which have inherited entrepreneurial skill and expertise from earlier
generations which had controlled such enterprises in past. That in the present case also
the director of the respondent-company Shri Arvind Mafatlal, the eldest male member of
the family, had descended from the common ancestor Mafatlal Gagalbhai who had
established this empire and which has further grown with passage of years. That when
such a powerful director who is the eldest male member of the family of the family is at
the helm of affairs the minority interest of the appellant who, according to him, was
entitled to 50% share in the family concerns as per the 1979 family settlement was
likely to be voted out and cornered by the influence of such a towering personality as
Arvind Mafatlal in the meeting of equity shareholders. Therefore, unfairness of the
Scheme has to be judged also from the point of view of its impact on the minority
shareholder who has a common ancestor Mafatlal Gagalbhai and who is sought to be
cornered and deprived of his just share in the family concerns by the machinations of
Shri Arvind Mafatlal. The Court has, therefore, to see whether the Scheme of
Amalgamation which is sought to be put through at the behest of the director of the
respondent-company is fair to the minority group of the appellant who claims 50%
share in the family concerns against the director of the respondent-company Shri Arvind
Mafatlal and his group. So far as this submission is concerned Shri Sorabjee, learned
Senior Counsel for the respondent joined issues and submitted that factually there is no
basis for such a contention as respondent-company is not controlled by Shri Arvind
Mafatlal who is one of the directors along with his son Hrishikesh but there are eleven
outside directors and the share-holding of Arvind Mafatlal and his group is not even
50% even including the share-holding of other subsidiary companies in which also
Arvind Mafatlal and his group may be shareholders. We find considerable force in the
aforesaid contention of learned Senior Counsel for the respondent. The evidence
produced in the case shows that out of total majority vote of 95.75 per cent which
supported the Scheme at the meeting of equity shareholders even according to the
pattern disclosed by the appellant himself individual trust controlled by Arvind Mafatlal
and private companies accounted to only 16% of the shares voted in the meeting, about
44% of the share were represented by financial institutions, employees and public taken
together and two companies stated to be from Mafatlal group had only 15% share.
Consequently it is too much to contend that the voting pattern was dominated by the
share-holding of Arvind of Mafatlal and his group when about 40% of the shares are
held by financial institutions which had nothing to do with the internal feuds of director

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 Arvind Mafatlal on the one hand had the appellant-objector on the other. It could not be
said that the Scheme as put to vote was in any way unfair to appellant or that the
majority shareholders acting as a class had not behaved in a bona fide manner for
protecting the interest of the class as a while and were in any way inimical to the
appellant. While considering the question of bona fides of the majority voters and
whether they were unfair to the appellant it has to be kept in view that bona fides of the
majority acting as a group has to be examined vis-a-vis the Scheme in question and not
the bona fides of the person whose persona) interest might be different from the
interest of the voters as a class. Bona fide of person can only be relevant if it can be
established with reasonable certainty that he represents majority or is controller of
majority. Arvind Mafatlal cannot be visited with such a charge. In this connection we
may usefully refer to a decision of English Court in the case of Hellenic and General
Trust Limited reported in (1976) 1 WLR 123. In that case the Court was concerned with
a Scheme of Arrangement whereunder all the ordinary shares of the company were to
be cancelled and new shares were to be issued to Hambros which would make the
company as wholly owned subsidiary of Hambros. Holders of such cancelled shares
were to be paid by Hambros at 48 pennies. In short it was an arrangement for taking
over of the company by Hambros. 53% shares of the Hellenic Company were held by
another company MIT. MIT itself was a wholly owned subsidiary company of Hambros.
This situation led the Court to conclude that the subsidiary company of Hambros which
was holding such large number of shares placed itself vis-a-vis Hambros in the position
of vendor and the lifted veil of transaction showed it to be one of acquisition than of
amalgamation. The aforesaid decision is a pointer to the fact that what was required to
be considered while sanctioning the scheme was bona fides of the majority acting as a
class and not of single person. It is, therefore, not possible to agree with the contention
of learned Senior Counsel for the appellant that the majority had acted unfairly to the
appellant and had not protected his interest when what was to be protected was the
class interest of minority shareholders falling in the same class along with the majority.
It is not the contention of the appellant that while voting by majority in favour of the
Scheme the majority had acted with any oblique motive to fructify any adverse
commercial interest qua him and his group when it consisted of outsiders like financial
institutions or that there was any possibility of their surrendering their economic
interest in the Scheme at the dictates of shareholder-director Arvind Mafatlal and his
group. It is also to be kept in view that the Board of Directors of the respective
companies, namely, the transferor-company as well as the transferee-company had
approved the Scheme of Amalgamation before it was put to vote. The appellant was
himself one of the directors of the transferor-company who had no objection to the
Scheme of Amalgamation from the point of view of the transferor-company. So far as
the transferee-company is concerned though appellant was not a director he was 5%
shareholder who did not think it fit to personally remain present at the time of voting
and simply relied upon proxy. If he was feeling that the Scheme was unfair to him or
was not going to protect his interest as shareholder in the respondent-company nothing
prevented him from remaining present and voicing his grievance before the General
Body of the equity shareholders and to apprise them of the alleged pernicious effect of
the Scheme. It is, therefore, too late in the day for him to contend that the Scheme was
unfair to him and that the family of Arvind Mafatlal had tried to dominate and engineer
any adverse pattern of voting at the meeting of the equity shareholders.
3 5 . In this connection we tried to know from Shri Shanti Bhushan, learned Senior
Counsel for the appellant as to how the appellant felt that the Scheme was unfair to
him. He submitted that under the Scheme the transferor-company was losing its identity
and was getting merged in the transferee-company. That in the pending litigation
between the parties in the Bombay High Court if the appellant succeeded in his counter-

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 claim he was likely to get larger share-holding in the transferee-company and if that
was not possible he could have got the complete control of the transferor-company as
per the family arrangement. Now once the transferor-company loses its identity then his
counter-claim was likely to be infructuous as the subject-matter of the counter-claim
will stand withdrawn from the possible operation of the decree if at all granted in his
favour in the counter-claim. This submission was countered by learned Senior Counsel
for the respondent by pointing out that it had no factual basis. That as earlier noted in
the suit pending in Bombay High Court if Arvind Mafatlal succeeded then appellant will
have to transfer his even remaining 5% share-holding in transferee-company in favour
of Arvind Mafatlal. If on the other hand the appellant succeeded in his counter-claim
and Arvind Mafatlals suit was dismissed then the appellant may get the shares which are
at present held by Arvind Mafatlal and his group in the transferee-company. But there is
no question of appellant getting any exclusive control of the transferor-company.
Therefore, impact of that litigation one way or the other is going to be totally negative
so far as the existence of the transferor-company or otherwise is concerned. We find
considerable force in the contention of learned Counsel for the respondent. It is also
pertinent to note that if the appellant felt that the Scheme was unfair inasmuch as he
was likely to lose his future interest, if any, and control, if any, in the transferor-
company by its merger and loss of identity on account of the Scheme it passes one's
comprehension how he as sitting director of the transferor-company approved of the
Scheme, did not object to the Scheme and on the contrary was a party to the resolution
of the Board of Directors of transferor-company to propose the Scheme of its
amalgamation with the transferee company. Not only that but even when that Scheme
was put for sanction before the Bombay High Court on behalf of the transferor-company
the appellant did not object meaning thereby appellant had no objection to the
transferor-company losing its identity and getting merged in the transferee-company
pursuant to the proposed Scheme. The appellant's own conduct, therefore, belies his
apprehension that the Scheme as proposed was in any was unfair to him or that there
were any mala fides behind the Scheme attributable to Shri Arvind Mafatlal who is the
director of the transferee-company. The second point for determination, therefore, also
is found to be factually not sustainable. It is, therefore, held that the Scheme of
Compromise and Arrangement is neither unfair nor unreasonable to the minority
shareholders represented by the appellant.
36. Before parting with the discussion on this point it is also worthwhile to note that
apart from the pattern of voting at the meeting of the equity shareholders, even the
share-holding of the respondent-company belies the submission put forward on behalf
of the appellant that Arvind Mafatlal's group dominated the Constitution of the company
and could control the decisions of the shareholders. The evidence on record shows that
the shareholding of ANM Group can be worked out to 30.42% approximately. As against
aforesaid share-holding the share-holding of financial institutions and MHM group in
MIL would work out to 39.03% and that of appellant's group works out at 29.05% while
that of other shareholders would work out to 34.34%. Hence it cannot be said that
Arvind Mafatlal is at the helm of affairs of the respondent-company or is in the driver's
seat or that his family is the virtual master of respondent-company. This is not a case
where it can be urged with any emphasis that the respondent-company is an alter ego
of Arvind Mafatlal who is one of the directors of the company and that he could create a
show of the Scheme being apparently beneficial to the shareholders but was in fact
concealing any covert and hidden device of augmenting his personal interest and
interest of his family which was adverse to the interest of innocent investors and other
equity shareholders including the appellant. It is also pertinent to note that financial
institutions and statutory corporations held substantive percentage of shares in
respondent-company. This class of shareholders who are naturally well informed about

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 the business requirements and economic needs and the requirements of corporate
finance in the light of their personal interest would not have wholly approved the
Scheme if it was contrary to the interest of shareholders as a class. Individual personal
interest of a minority shareholder like the appellant is absolutely out of consideration
when such class meeting acting for the benefit to the whole class of equity shareholders
take up the consideration of the Scheme for its approval. Consequently it could not be
said that the majority shareholders had sacrificed the class interest of appellant minority
shareholders when they voted with overwhelming majority in favour of the Scheme.
Point No. 2 is accordingly answered in the negative. That takes us to the consideration
of Point No 3 for determination.
Point No. 3
37. In a way the answer to point No. 2 necessarily results in negativing this point also.
Even that apart we fail to appreciate how the Scheme of Amalgamation can be said to
be unfair and amounting to suppression of minority shareholders represented by the
appellant. It has to be kept in view that by this proposed Scheme of Amalgamation the
transferor-company was getting merged in the transferee-company. Now even if it is
held that the appellant succeeds in his counter-claim in the suit pending in Bombay
High Court and if he is to get the share-holding of Arvind Mafatlal and his group
transferred to him so far as transferee-company is concerned, the transferee-company
because of the amalgamation will then be having more diversified activities and if at all
according to the appellant, because of this future success, if any, in the counter-claim
he is going to replace Arvind Mafatlal and his group in the management of the
respondent-company he would have larger field to operate and larger company to
manage. We fair to appreciate as to how such a scheme from any point of view can
amount to suppression of appellant's minority interest in the share-holding of the
company. This interest is not going to be in any way adversely affected. If at all, his
share-holding is going to increase in the respondent-company if his counter-claim
succeeds. If his counter-claim fails he will have to get out lock, stock and barrel from
the respondent-company and he will have to wash his hands off the same. In either
case the Scheme of Amalgamation will have no adverse impact on the appellant's
interest in the respondent-company. On the other hand the Scheme of Amalgamation is
likely to have a move beneficial effect on the appellant's share-holding in the
respondent-company if he succeeds in his counter-claim in Bombay High Court. It has
to be kept in view that the question of bona fide of the majority shareholders or the
alleged suppression by them of the minority shareholders or their attempt to suffocate
their interest has to be judged from the point of view of the class as a whole. Question
is whether the majority equity shareholders while acting on behalf of the class as a
whole had exhibited any adverse interest against the appellant's minority shareholders
also having similar interest as members of the same class, while approving the Scheme
or had acted with any oblique motive to whittle down such a class interest of the
minority. As we have seen earlier no such situation ever existed both at the time when
the Scheme of Compromise and arrangement was cleared and proposed by the Board of
Directors of both the transferor and transferee companies and also at the stage when
the Scheme was put to vote before the meeting of equity shareholders forming a
common class of which the appellant was also a member though a minority member.
Consequently point No. 3 will also have to be answered in the negative on the same
lines and for the same reasons on the basis of which point No. 2 is answered.
Point No. 4
38. So far as this point is concerned the relevant provisions of the Companies Act to

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 which we have made a reference earlier indicate that the Court has to order under
Section 393(1)(a) meeting of creditors or class of creditors or members or class of
members to whom the Scheme of Compromise or Arrangement is offered by the
company. The present controversy centers round a meeting of members. Members of
the company are shareholders. Part IV of the Companies Act deals with 'Share Capital
and Debentures'. Section 82 provides that 'the shares or other interest of any member
in a company shall be movable property, transferable in the manner provided by the
articles of the company'. As per Section 86 the share capital of a company limited by
shares formed after the commencements of this Act, or issued after such
commencement, shall be of two kinds only, namely, equity share capital and preference
share capital. So far as the Articles of Association of respondent-company are
concerned they also contemplate two classes of shareholders, namely, equity and
preference shareholders. No separate class of equity shareholders is contemplated
either by the Act or by the Articles of Association of respondent-company. Appellant is
admittedly an equity shareholder. Therefore, he would fall within the same class of
equity shareholders whose meeting was convened by the orders of the Company Court.
However it is vehemently contended by learned Counsel for the appellant that because
of the family arrangement of 1979 on which he relies he was a special class of minority
equity shareholder who had separate rights against the director of the company and
whose special interest because of the pending litigation between him and the director
Shri Arvind Mafatlal was likely to be adversely affected by the Scheme, therefore, a
separate meeting had to be convened as he represented a class within the class of
equity shareholders. It is difficult to agree with this contention. Even though the
Companies Act or the Articles of Association do not provide for such a class within the
class of equity shareholders, in a given contingency it may be contended by a group of
shareholders that because of their separate and conflicting interest, vis-a-vis other
equity shareholders with whom they formed a wider class, a separate meeting of such
separately interested shareholders should have been convened. But such is not the case
of the appellant. It is not his case that his interest as an equity shareholder in
respondent-company is in any way conflicting with the general interest of the equity
shareholders as a Class. Consequently it could no be urged by him with any emphasis
that the General Body of equity shareholders acting as a class while considering the
question of approval of the Scheme was likely to take a decision which could adversely
affect the commercial interest of the appellant as an equity shareholder. His personal
conflict of interests with the director was totally foreign to the scope of class meeting
which was convened to consider the Scheme in question as we have seen earlier while
considering earlier points for determination. It is also to be kept in view that the
appellant would have urged with some justification his contention for convening a
separate meeting representing for him and his group of dissenting equity shareholders
if it was his case that the Scheme of Compromise and Arrangement as offered to him
and his group was in any way different from the Scheme of Compromise and
Arrangement offered to other equity shareholders who also belonged to the same class
in the wider sense of the term. On the express language of Section 393(1) it becomes
clear that where a compromise or arrangement is proposed between a company and its
members or any class of them a meeting of such members or class of them has to be
convened. This clearly presupposes that if the Scheme of Arrangement or Compromise
is offered to the members as a class and no separate Scheme is offered to any subclass
of members which has a separate interest and a separate Scheme to consider, no
question of holding a separate meeting of such a Sub-class would at all survive. Even
otherwise it becomes obvious that as minority shareholder if the appellant had to
dissent from the Scheme his dissent representing 5% equity shareholding would have
been visible both in a separate meeting if any, of his Sub-class or in the composite

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 meeting where also his 5% dissent would get registered by appellant either remaining
present in person or through proxy. Consequently when one and the same Scheme is
offered to the entire class of equity shareholders for their consideration and when
commercial interest of the appellant so far as the Scheme is concerned is in common
with other equity shareholders he would have a common cause with them either to
accept or to reject the Scheme for commercial point of view. Consequently there was no
occasion for convening a separate class meeting of the minority equity shareholders
represented by the appellant and his group as tried to be suggested. It is also to be
kept in view that it is not the case of the appellant that any different terms of
compromise were offered to persons holding equity shares who were covering by the
family arrangement of 1979 or otherwise. In fact the entire proposal of the Scheme of
Arrangement was one affecting equally and in the like manner all the existing equity
shareholders of the respondent-company. In this connection it is profitable to refer to
what the learned author Palmer in his Treatise Company Law 24th Edition, has to say :
What constitutes a class :
The Court does not itself consider at this point what classes of creditors
or members should be made parties to the scheme. This is for the
Company to decide, in accordance with what the scheme purports to
achieve. The application for an order for meetings is a preliminary step,
the applicant taking the risk that the classes which are fixed by the
judge, unusually on the applicant's request, are sufficient for the
ultimate purpose of the section, the risk being that if in the result, and
we emphasis the words 'in the result' they reveal inadequacies, the
scheme will not be approved. If e.q. rights of ordinary shareholders are
to be altered, but those of preference shares are not touched, a
meeting of ordinary shareholders will be necessary but not of
preference shareholders. If there are different groups within a class the
interests of which are different from the rest of the class, or which are
to be treated differently under the Scheme, such groups must be
treated as separate class for the purpose of the scheme. Moreover,
when the Company has decided what classes are necessary parties to
the scheme, it may happen that one class will consist of a small
number of persons who will all be willing to be bound by the scheme.
In that case it is not the practice to hold a meeting of that class, but to
make the class a party to the scheme and to obtain the consent of all
its members to be bound. It is however, necessary for at least one
class meeting to be held in order to give the Court jurisdiction under
the Section.
It is, therefore, obvious that unless a separate and different type of Scheme of
Compromise is offered to a sub-class of a class of creditors or shareholders otherwise
equally circumscribed by the class no separate meeting of such sub-class of the main
class of members or creditors is required to be convened. On the facts of the present
case the appellant has not been able to make out a case for holding a separate meeting
of dissenting minority equity shareholders represented by his. The fourth point for
determination, therefore, is answered in the negative. That takes us to the consideration
of the last point for determination placed for our consideration by the learned Senior
Counsel for appellant.
Point No. 5

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 3 9 . It was submitted that the exchange ratio of equity shareholders so far as the
transferee-company is concerned works very unfairly and unreasonably to them. As per
the proposed Scheme 5 equity shares of transferor-company are to be exchanged for 2
equity shares of transferee-company. So far as this contention is concerned it has to be
kept in view-that before formulating the proposed Scheme of Compromise and
Amalgamation an expert opinion was obtained by the respondent-company as well as
the transferor-company, namely, MFL on whose Board of Directors appellant himself
was a members. M/S. C.C. Chokshi & Co., a reputed firm of Chartered Accountants,
having considered all the relevant aspects suggested the aforesaid exchange ratio
keeping in view the valuation of shares of respective companies. It must at once be
stated that valuation of shares is a technical and complex problem which can he
appropriately left 1 to the consideration of experts in the filed of accountancy.
Pennington in his 'Principles for Company Law' mentions four factors which had to be
kept in mind in the valuation on shares :
(1) Capital Cover,
(2) Yield,
(3) Earning Capacity, and
(4) Marketability
For arriving at the fair value of share, three well known methods are applied :
(1) The manageable profit basis method (the Earning Per Share
Method)
(2) The net worth method or the break value method, and
(3) The market value method.
So many imponderables enter the exercise of valuation of shares. M/s. C.C. Chokshi &
Co. considering all the relevant aspects and obviously keeping in view the accounting
principles underlying the valuation of shares suggested the said ratio which was found
acceptable both by the Board of Directors of the respondent-company as well as the
Board of Directors of the transferor-company. That the appellant himself as a director of
that transferor-company gave green single to the Scheme and to this very ratio of
exchange of shares. But Shri M.J. Thakore appearing for the appellant submitted that
form the point of view of the transferor-company it was very profitable to have two
shares of transferee-company against five shares of transferor-company. But the
difficulty arises only from the point of view of transferee-company shareholders.
According to Shri Thakore the proper exchange ratio would be one share of transferee-
company to six shares of transferor-company. It is difficult to appreciate this contention
of the appellant. It has to be kept in view that appellant never bothered to personally
remain present in the meeting of equity shareholders for pointing out the unfairness of
this exchange ratio to his brother equity shareholders who were likely to be affected by
the very same ratio as the appellant. His interest at least to that extent was entirely
common and parallel to that of other equity shareholders. But he had no time to remain
personally present. He sent his proxy only to record his dissent vote which was in
microscopic minority of 5% as compared to 95% majority vote. Not only that even
before the Court he did not submitted and contrary expert opinion regarding the
valuation of shares of transferor and transferee companies for supporting his ipse dixit
that the correct ratio would be 6 : 1 so far as transferor and transferee companies were

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 concerned. Shri Shanti Bhushan, learned Senior Counsel for the appellant having
realised this difficulty submitted that at last these proceedings are continuation of
proceedings before the High Court, therefore, this Court may now in order to satisfy
itself send for the opinion of an expert. It is difficult to agree. The appellant who was
propounding this theory of correct exchange ratio had nothing to offer in support of his
contention both before the learned Single Judge as well as before the High Court. It has
to be kept in view that the matter was fiercely contested on all permissible points before
learned Single Judge. The proceedings were pending before the High Court for more
than two years from 8th February 1994 till 12th July 1996 when the Division Bench
disposed of the appeal. For all these years neither before the learned Single Judge nor
before the High Court in appeal the appellant thought it fit to request the Court to either
call for the report of any other expert on valuation of shares not did he himself get such
report for placing for consideration of the Court in support of his supposed better ratio.
It has also to be kept in view that which exchange ratio is better is in the realm of
commercial decision of well informed equity shareholders. It is not for the Court to sit
in appeal over this value judgment of equity shareholders who are supposed to be men
of the world and reasonable persons who know their own benefit and interest
underlying any proposed scheme. With open eyes they have okayed this ratio and the
entire Scheme. 40% of the majority shareholders were financial institutions who were
supposed to be well versed on the aspect of valuation of shares. They had no objection
to the exchange of 2 shares of transferee-company for 5 shares of transferor-company.
As stated earlier it was a sort of a package duly considering all imponderables and
implicit factors which the shareholders had to keep in view for deciding whether to
approve the Scheme of Amalgamation or not. The exchange ratio was only one of the
items. They though if fit in their commercial wisdom to accept the Scheme as a whole
along with the exchange ration presumably in expectation of better profits in years to
come when the amalgamated companies would operate and when there would be,
according to the shareholders, better prospects of earning greater dividends. They
willingly agreed to give in exchange two shares of transferee-company for five share of
transferor-company and made them available to the shareholders of the transferor-
company. The appellant was representing only 5% dissenting shareholders and his
object was almost a voice in the wilderness, which did not appeal to the majority of his
brother shareholders. Shri Shanti Bhushan, learned Senior Counsel for the appellant in
this connection invited our attention to the observation of the Division Bench in its
judgment at page 375 wherein it has been observed that "if one were to examine the
exactitude of exchange ratio that may be offered fairly on the arithmetic scale by taking
into consideration various details, there is some force in what were suggested by Mr.
B.R. Shah on behalf of the appellant. However, keeping in view the scope of enquiry
which the court is required to undertake and with whose findings we are concerned, it
will not be permissible for us in law to undertake this exercise in the facts and
circumstances of present case in absence of bona fides". We fail to appreciate how this
observation can be of any avail to learned senior conceal for the appellant as all that the
Court wanted to suggest was that even assuming that some another exchange ratio can
be suggested to be better one, it was for the equity shareholders who acted bona fide in
the interest of their class as a whole to accept even a less favourable ratio considering
other benefits, that may offset such less favourable ratio once an amalgamation goes
through. We wholly concur with this view. In this connection we may also refer to a
decision of Maughm, J., In Re Hoare & Co. (No. 2) case (1933) All ER 105 wherein it
was laid down that where statutory majority had accepted the offer the onus must rest
on the applicants to satisfy the court that the price offered is unfair. In this connection
following pertinent observations were made by the learned Judge :
The other conclusion I draw is this X X X X X X the court ought to regard the

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 scheme as a fair one inasmuch as it seems me impossible to suppose that the
court, in the absence of any strong grounds, is to be entitled to set up its own
view of fairness of the scheme in opposition to so very large a majority of
shareholders who are concerned. Accordingly, without expressing a final
opinion on the matter because there may be special circumstances in special
cases, I am unable to see that I have any right to order otherwise in such a
case as I have before me, unless it is affirmatively established that
notwithstanding the views of a very large majority of shareholder, the scheme
is unfair.
We may also refer to a decision of the Gujarat High Court in Kamala Sugar Mills Limited
55 Company Cases p. 308 MANU/TN/0005/1980 dealing with an identical objection
about the exchange ratio adopted in the Scheme of Compromise and Arrangement. The
Court observed as under :
Once the exchange ratio of the shares of the transferee-company to be allotted
to the shareholders of the transferor-company has been worked out by a
recognised firm of chartered accountants who are experts in the field of
valuation and if no mistake can be pointed out in the said valuation, it is not for
the court to substitute its exchange ratio, especially when the same has been
accepted without demur by the overwhelming majority of the shareholders of
the two companies or to say that the shareholders in their collective wisdom
should not have accepted the said exchange ratio on the ground that it will be
detrimental to their interest.
These observations in our view represent the correct legal position on this aspect. We
may also keep in view that in the present case not only expert like M/s. C.C. Chokshi &
Co. had suggested the ratio but another independent body ICICI Security & Finance
Company Limited reached the same conclusion which was conveyed by its letter dated
10th November 1993 to the company approving of the entire Scheme along with
suggested ratio. A mere look at the report of the Chartered Accountants M/s. C.C.
Chokshi & Co. shows that various factors underlying the Scheme of Compromise and
Arrangement were taken into consideration while suggesting the exchange ratio by the
said reputed firm of chartered accountants. The said opinion had taken into account the
fact that on amalgamation shares have to be cancelled. Increase in share premium
account in equity capital of the MIL will also have to be taken into account as a result of
final call made in respect of Bond 1992 issue. It has also taken into account significant
increase in the paid-up equity of MIL as a result of issue of its Bond in the international
market. It has undertaken exercise in calculating net-worth of two companies. It has
also referred to the method of valuation of exchange ratio on the basis of earning per
share of the two companies by taking into account five years' working results of the two
companies making certain adjustments. Apart from taking into consideration the past
results of the two companies, the chartered accountants have taken into account the
potentiality of the two companies to earn profit in future, considering existing
expansion and modernisation of projected and planned expenditure by the MIL as well
as subsidiary and sister concern in hard. It has also taken into account the market price
of equity shares of past 24 months, declared dividend by the two companies the overall
effect of security scam in the market price, realisable investment and their market value.
Taking into consideration multifarious considerations detailed in the report, note was
also taken of the fact that MIL held substantial shares of MFL, which shall have to be
cancelled on merger of MFL with MIL. Two fully paid up equity shares of MIL of Rs. 100
each for every five equity share of Rs. 100 each of MFL, was considered to he a fair
exchange ratio to be offered as term of amalgamation. It was clarified that, 'in absolute

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 terms it would mean that the MIL is keeping consideration of equity capital of par value
of Rs. 7.77 crores which at the last issue price of share amounts about to Rs. 38.84
crores and which at the correct market price amounts to Rs. 57.4 crores. At the stage of
dividend declared for 1992-93, it will result in a cost in terms of distributable profits of
Rs. 2.72 crores. For an undertaking in a diversified business activity of textile and
chemicals with the total infrastructure, knowhow, technology tie up and range of
established products and capacities and potential the aforesaid cost to MIL can be
regarded as fair and reasonable'.
4 0 . The aforesaid report of the chartered accountants heavily weighed with the
transferor-company's Board of Directors which comprised, amongst others, the
appellant himself but also the Board of Directors of transferee-company and also
weighed with the General Body of equity shareholders who approved the Scheme and
the ratio with overwhelming majority. No grievance, therefore, can be make by the
appellant at the stage of Company Petition proceedings for demonstrating the ratio to be
ex facie unfair and unacceptable as the appellant would like to have it.
4 1 . Undeterred by this position Shri Thakore, learned Counsel for the appellant in
support of his contention that the exchange ratio was ex facie unfair to the shareholders
of the transferee-company, invited our attention to the statement showing the working
results of both the transferor and transferee companies as found at Annexures M and N
of Vol. II of the Paper Book at page 534 and 535. He submitted that these statements
showing the working results of the company for the last five years ended 31st March
1993 showed that the earning per equity share after depreciation and tax so far as the
respondent-company was concerned was Rs. 30 while earning of transferor-company
Mafatlal Fine Spg. & Mfg. Company Limited was only Rs. 7 for the relevant five years.
He also invited our attention to the break-up value of the shares of company on the
basis of the Balance Sheet as on 31st March 1993 so far as respondent-company was
concerned. Annexure 'Q' at page 538 showed value per equity share of Rs. 100 each at
Rs. 1,515 while so far as the transferor-company was concerned the break-up value per
equity share was Rs. 259. That may be so. But as a package deal when the Scheme as a
whole is examined and found to be advantageous to the economic and commercial
interest of shareholders as a class only one or two item simplicitor for deciding the
exchange ratio cannot tilt the balance as so may factors and aspect would enter that
exercise. It was undertaken by expert body of chartered accountants like M/s. C.C.
Chokshi & Co. Before parting with the discussion on this point it would be apposite to
refer to the decision of this Court in Hindustan Lever Employees' Union (supra). In
paragraph 41 of the Report Justice Sen speaking for himself and Venkatachaliah, CJ,
and to which Sahai, J concurred has observed that the problem of valuation in the case
of amalgamation of two companies has been dealt with by Weinberg and Blank in the
book 'Take-overs and Mergers' in which it is stated that some or all of the 8 listed
factors will have to be taken into account in determining the final share exchange ratio.
The Court has also approved the fixation of exchange ratio of the shares of the
companies on the basis of adoption of combination of two or more well-known methods
of valuation of shares out of many such methods. In para 37 of the Report it has been
observed that the question is what method should be adopted for arriving at a proper
exchange ratio. The usual rule is that shares of the going concern must be taken at
quoted market value. This principle was also recognised by this Court in the case of
CWT v. Mahadeo Jalan MANU/SC/0305/1972 : [1972]86ITR621(SC) . It is not the case
of the appellant that M/s. C.C. Chokshi & Co. had not taken into consideration the
quoted market value of shares of both the companies which were going concerns and
which were subjected to the Scheme of Amalgamation in question. For all these
reasons, therefore, there is no substance in this contention canvassed on behalf of the

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 appellant that the exchange ratio was ex facie unfair to the equity shareholders of the
transferee-company. The fifth point for determination is also, therefore, answered in the
negative.
4 2 . Before parting with this appeal we may mention that written submissions
comprising of 69 pages have been submitted by learned Counsel for the appellant. We
have gone through the written submissions. We may mention that learned Counsel for
the appellant was permitted to file written submissions spread over 4 to 5 pages while
his written submission have gone upto 69 pages. It may also be mentioned that there
was an order passed by us 21st August 1996 permitting filing of written statements
within two days but the learned Counsel for the Appellant has filed written submissions
only on 27th August 1996. Therefore, ex facie his written submissions are not required
to be considered. However in order to see that the appellant may not suffer on account
of non-consideration of these written submission we have gone through them and have
considered them in the interest of justice. But having gone through the same we find
that they involve repetition of the main contentions canvassed before us during oral
arguments by their learned Senior Counsel Shri Shanti Bhushan and by their Counsel
Shri M.J. Thakore. Some additional points also appear to have been raised in the written
submissions pertaining to additional objections which were not pressed before us at the
time of oral hearing and, therefore, they obviously cannot be considered in support of
the contentions on which the appeal was pressed before us. The written submissions in
connection with the points which were already pressed before us are already dealt with
by us while considering the main points for determination in the earlier part of this
judgment and, therefore, it is not necessary to deal with the same once again.
4 3 . These were the only contentions canvassed in support of the points for
determination which have all been answered in the negative. The inevitable result is
that the appeal fails and is dismissed. In the facts and circumstances of the case,
however, there will be no order as to costs.
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