REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NOS.  7115-7120   OF 2008  (Arising out of SLP (C) Nos. 25511-25516 of 2007)

Chembra Orchard Produce Ltd. & Ors. … Appellants

      versus

Regional Director of Company Affairs & Anr. … Respondents

O R D E R

Leave granted.

The  short  question  which  arises  for  determination  in  these  Civil

Appeals is whether an application filed by the Company under Section 391

(1) of the Companies Act, 1956 (for short the ‘1956 Act’) seeking directions

to  convene a meeting of creditors and members to consider  a scheme of

amalgamation is required to be heard and decided ex-parte as per Rule 67 of

the Companies (Court) Rules, 1959?

To  answer  the  above  question  we  need  to  quote  hereinbelow  the

relevant Rules.

“Rule 2(9)  ‘Judge’s  summons’ means  a summons returnable before the Judge in Chambers or in Court. …

67.  Summons  for  directions  to  convene  a  meeting.-   An application  under  section  391(1)  for  an  order  convening  a meeting of creditors and/ or members or any class of them shall be by a Judge’s summons supported by an affidavit. A copy of the proposed compromise or arrangement shall be annexed to the affidavit as an exhibit thereto. Save as provided in rule 68 hereunder,  the  summons  shall  be  moved  ex  parte.  The summons shall be in Form No. 33, and the affidavit in support thereof in Form No. 34.

68. Service  on  company-  Where  the  company  is  not  the applicant, a copy of the summons and of the affidavit shall be served on the company, or, where the company is being wound- up, on its liquidator, not less than 14 days before the date fixed for the hearing of the summons.

69. Directions at hearing of summons.-  Upon the hearing of the summons or any adjourned hearing thereof, the Judge shall, unless he thinks fit for any reason to dismiss the summons, give such  directions  as  he  may think  necessary  in  respect  of  the following matters: —

(1) determining the class or classes of creditors and/or of members whose meeting or meetings have to be held for considering the proposed compromise or arrangement;

(2) fixing the time and place of such meeting or meetings;

(3) appointing a chairman or chairmen for the meeting or meetings to be held, as the case may be;

(4) fixing the quorum and the procedure to be followed at the meeting or meetings, including voting by proxy;

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(5)  determining  the  values  of  the  creditors  and/or  the members, or the creditors or members of any class, as the case may be, whose meetings have to be held;

(6) notice to be given of the meeting or meetings and the advertisement of such notice;

(7) the time within which the Chairman of the meeting is to report to the Court the result of the meeting; and such other matters as the Court may deem necessary.

The order made on the summons shall be in Form No. 35 with such variations as may be necessary.”

… 73. Notice of meeting.-  The notice of the meeting to be given to the creditors and/or members, or to the creditors or members of any class, as the case may be, shall be in Form No. 36, and shall be sent to them individually by the Chairman appointed for the meeting, or, if the Court so directs, by the company (or its Liquidator), or any other person as the Court may direct, by post under certificate of posting to their last known address not less than 21 clear days before the date fixed for the meeting. It shall be accompanied by a copy of the proposed compromise or arrangement  and  of  the  statement  required  to  be  furnished under section 393, and a form of proxy in Form No. 37.

74.  Advertisement of the notice of meeting.-  The notice of the meeting shall be advertised in such newspapers and in such manner  as the  Judge may direct,  not  less  than 21 clear  days before the date fixed for the meeting. The advertisement shall be in Form No. 38.

75. Copy of compromise or arrangement to be furnished by the company.-  Every creditor or member entitled to attend the meeting shall be furnished by the company, free of charge and within 24 hours of a requisition being made for the same, with

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a copy of  the  proposed compromise or  arrangement  together with  a copy of  the  statement  required  to  be furnished under section 393, unless the same had been already furnished to such member or creditor.

76.  Affidavit  of  service.-  The  Chairman  appointed  for  the meeting or the Company or other person directed to issue the advertisement  and  the  notices  of  the  meeting  shall  file  an affidavit  not  less  than  7  days  before  the  date  fixed  for  the holding  of  the  meeting  or  the  holding  of  the  first  of  the meetings,  as  the  case  may  be,  showing  that  the  directions regarding the issue of notices and the advertisement have been duly complied with. In default  thereof,  the summons shall be posted before the Judge for such orders as he may think fit to make. …

79. Petition  for  confirming  compromise  or  arrangement.- Where the proposed compromise or arrangement is agreed to, with or without modification, as provided by sub-section (2) of section 391, the company, (or its Liquidator, as the case may be),  shall,  within  7  days  of  the  filing  of  the  report  by  the Chairman, present a petition to the Court  for confirmation of the compromise or arrangement. The petition shall be in Form No. 40.

Where a compromise or arrangement is proposed for the purposes  of  or  in  connection  with  a  scheme  for  the reconstruction  of  any  company  or  companies,  or  for  the amalgamation of any two or more companies, the petition shall pray for appropriate orders and directions under section 394.

Where  the  company  fails  to  present  the  petition  for confirmation of the compromise or arrangement as aforesaid, it shall be open to any creditor or contributory as the case may be, with  the  leave  of  the  Court,  to  present  the  petition  and  the Company shall be liable for the costs thereof.

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Where no petition for confirmation of the compromise or arrangement  is  presented,  or  where  the  compromise  or arrangement has not  been approved by the requisite  majority under  section  391(2)  and  consequently  no  petition  for confirmation could be presented, the report of the Chairman as to the result of the meeting made under the preceding rule shall be placed for consideration before the Judge for such orders as may be necessary.

80.  Date and notice of hearing.-  The Court shall fix a date for the hearing of the petition, and notice of the hearing shall be  advertised  in  the  same papers  in  which  the  notice  of  the meeting was advertised, or in such other papers as the Court may direct, not less than 10 days before the date fixed for the hearing.”

We also quote hereinbelow Form No.33 and Form No.34:-

FORM NO. 33 [See Rule 67]

[Heading as in Form No. 1] Company Application No. ............... of 19.....

............... Applicant(s)

Summons for Directions to Convene a Meeting under section 391

Let all parties concerned attend the Judge in Chambers on  ..:..,.........  day,  the............day  of  ........  19...  at  ............... o'clock in the ............... noon on the hearing of an application of  the  abovenamed  company  (or  of  the  applicant(s) abovenamed)  for  an  order  (that  a  meeting  (or  separate meetings) be held at ............... of (Here enter the creditors or class of creditors, e.g., debenture-holders, other secured credi- tors,  unsecured  creditors,  etc.,  or  the  members  or  class  of members,  e.g.,  preference  shareholders,  equity  shareholders, etc. of which class or classes, the meeting have to be held) of the  above  company,  for  the  purpose  of  considering,  and  if thought fit, approving, with or without modification, a scheme

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of compromise or arrangement proposed to be made between the company and the said [here mention the creditors or class of creditors or members, or the class of members] of the said company.

And that  directions  may be given as to  the method of convening, holding and conducting the said meeting(s) and as to the notices and advertisements to be issued.

And that a chairman (or chairmen) may be appointed of the said meeting(s), who shall report the result there of to the Court.

Advocate for the applicant(s) Registrar.

The affidavit of............... will be used in support of the summons.

[Note:--Where the company is not the applicant, the summons should be served on the company, or, where it is being wound- up, on its liquidator.]”

“FORM NO. 34 [See Rule 67]

[Heading as in Form No. 1] Company Application No. ............... of 19.....

............... Applicant(s).

Affidavit in Support of Summons

I, ............... of etc., solemnly affirm and say as follows :--

1.  I  am  the  managing director/secretary/director/ ............ .../of the said company, (or an auditor of the said company authorised by the directors to

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make  this  affidavit/or  liquidator  of  the  said  company  in liquidation).  

[Where  the  application  is  not  by  the  company  or  its liquidator,  but  by a member or  creditor  the above paragraph should be suitably altered.]

2.  The  company  was  incorporated  on  ...............  19..... The  document  now produced  and  shown  to  me is  a  printed copy of the memorandum, and articles of association of the said company, and also contains copies of all the special resolutions which have been passed and are now in force.

3.  The  registered  office  of  the  company  is  situated at...............

4.  The capital  of the company is  Rs. ............... divided into ............... (here set out the classes of shares issued and the amounts paid up on each share).  

5.  The  objects  of  the  company  are  set  out  in  the memorandum of association annexed hereto. They are briefly (here set out the main objects in brief).

6.  The  company  commenced  the  business  of............... (e.g., hides and skins, etc.) and has been carrying on the same since...............

7. [Here set out in separate paragraphs the circumstances that  have  necessitated  the  proposed  compromise  or arrangement, the objects sought to be achieved by it, the terms of the compromise or arrangement, and the effect if any, of the compromise  or  arrangement  on  the  material  interests  of  the directors,  managing director,  managing agent,  secretaries and treasurers  or  the  manager  of  the  company,  and  where  the compromise  or  arrangement  affects  the  interests  of  the debenture  holders,  its  effect  on  the  material  interests  of  the

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trustees of the debenture trust deed.  A copy of the  proposed compromise  or  arrangement  should  be  marked  as  an  exhibit and annexed to the affidavit].

8. [Here set out the class of creditors or members with whom the compromise or arrangement is to be made; where the arrangement  is  between  the  company  and  its  members,  it should be stated whether any creditors or class of creditors are likely to be affected by it.]

9.  It  is  necessary  that  a  meeting  (or  meetings)  of  the creditors/members (if  the meeting is  to be only of a class  of creditors or a class of members, it should be so stated) should be called to consider and approve the proposed compromise or arrangement.

10. It is suggested that the meeting (or meetings) may be held at the premises of the registered office of the company or at such other place as may be determined by the Court, and on such date(s) and at such time(s) as this Court may direct; and that a chairman may be appointed for the meeting (or for each of the meetings) to be held.

11.  It  is  suggested  that  notice  of  the  proposed compromise  or  arrangement  and  of  the  meeting  may  be published once in (here set  out  the newspapers)  and in  such other manner as the Court may direct.

12. It is prayed that necessary directions may be given as to  the  issue  and  publication  of  notices  and  the  convening, holding and conducting of the meeting(s) proposed above.

Solemnly affirmed, etc.  

(Sd.) X.Y.

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                      Before me

(Sd.).........…………...

Commissioner for Oaths”.

The appellant –Company moved Company Application Nos. 354 to

359 of  2003 before the Karnataka High Court  on 17th April,  2003 under

Sections  391 to 394 of the Companies Act,  1956 in the form of Judge’s

Summons  for  Directions  supported  by an  affidavit  to  hold  a  meeting  of

shareholders  and  members  to  consider  the  proposed  scheme  of

amalgamation.  The  applications  were  filed  stating  that  the  applicant  had

entered into the said Scheme under which it was proposed to amalgamate

appellant  Nos.  1  to  5  into  the  6th appellant  –  Company.  This  proposed

Scheme of Amalgamation was in fact approved by the Board of Directors

vide  Resolution  dated  15th February,  2003 stating  that  the  amalgamation

would  result  in  economy of  scale.  In  accordance  with  Rule  67,  Judge’s

Summons  for  Directions  regarding  holding  of  meetings  was  moved  ex-

parte.

When the Company Application regarding holding of meeting came

before the Company Judge on 15th March, 2004, a query was raised as to

whether it was not necessary to hear the share-holders and creditors before

issuing  directions  for  holding  meeting  of  share-holders  and  creditors.

Appellant contended that Rule 67, quoted above, did not contemplate the

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hearing of any person, including share-holders and creditors, before issuing

directions for holding of meetings.

By impugned judgment dated August 20, 2007, the Division Bench of

the Karnataka High Court on reference answered the above question of law

stating that hearing of all parties was necessary before the Company Court

could issue directions  to convene a meeting under Section 391(1) of  the

Companies Act and that an ex-parte order in that connection could not be

passed. It is this order which is under challenge.

At the outset, it may be stated that the Companies (Court) Rules, 1959

are enacted in exercise of the powers conferred by Section 643(1)(2) of the

Companies Act, 1956. They have force of an Act passed by the Parliament.

The  said  Rules  1959  have  statutory  force  of  law.  The  said  Rule  67  in

unequivocal  terms states  that  an  application  under  Section 391(1)  for  an

order for convening a meeting of creditors and/or members or any class of

them shall  be by a Judge’s Summons supported by an affidavit.  Rule 67

further requires the proposed compromise or arrangement to be annexed to

the affidavit as an exhibit. Rule 67 is, however, subject to Rule 68 (which

deals with a case where the Company is not the applicant). If one reads Rule

67 with Form 33 and Form 34,  one find that  essentially the Court  while

issuing such summons is required to apply its mind to checklist indicated in

Rule 69 and it needs to be prima facie satisfied about the genuineness and

bonafides of the application. One aspect needs to be highlighted.  Hearing

of the Motion ex-parte does not mean that the Court had not to apply its

mind or that the Court is not required prima facie to be satisfied about the

genuineness  or  bonafides.  However,  it  is  a  preliminary  step.  One  more

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aspect  needs  to  be  mentioned.  If  hearing  is  required  to  be  given  to

contributors, creditors and share-holders, then the entire scheme of Section

391 (which is a Code by itself) would become unworkable. Further, when

Rule 67 categorically states that Summons for Directions shall be moved ex-

parte, the question of prejudice or rule of natural justice does not come into

play. However, there is a rationale for stating that the Summons shall  be

moved ex-parte and that rationale is that it is an Application for an Order for

Meeting as a preliminary step at the threshold stage and at that stage it is not

necessary  for  the  Company  to  give  notice  of  hearing  to  the  creditors,

members and share-holders (see: Palmer’s Company Law). Further, if one

examines Rule 67 in the context of Rule 73, one finds that after Summons

for Direction are issued as and when the meeting is ordered to be convened,

the notice  of  the  meeting  is  required to  be given to  the  creditors  and/or

members or such other classes enumerated in Rule 73. Similarly, under Rule

74 advertisement of the notice of meeting is also required to be published in

such newspapers and in such manner as the Judge may direct. This is to be

supported by affidavit of service under Rule 76.

The  analysis  of  the  above  Rules  indicates  that  there  is  a  clear

dichotomy between the threshold stage of issuance of directions to convene

a  meeting  and  the  subsequent  stage  of  a  notice  of  meeting  which  is

contemplated by Rule 73 and for that precise reason Rule 67 states that the

summons shall be moved ex-parte.

Our view is supported by various  judgments  of  this  Court  and the

High Courts. As far as the scheme of Sections 391 to 394 of the Companies

Act is concerned, we quote hereinbelow Paragraph 28 of the judgment of

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this Court in the case of Miheer H. Mafatlal  v.  Mafatlal Industries Ltd.

reported in 1997 (1) SCC 579:

“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.

(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,

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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 directors, managing agents, 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  insofar  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  or  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

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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 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  voters  concerned  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 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

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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 shareholders 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 company concerned, 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 scheme concerned 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 requisite majority vote.”

In the case of Sakamari Steel & Alloys Ltd. reported in 51 Company

Cases page 266, the learned Single Judge of the Bombay High Court held

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that Section 391(1) is not a sign-post but a check-post whereat it is a duty of

the Court to examine the genuineness and the bonafides of the Scheme for

itself.

A reading of the above judgment would, therefore, show that at the

stage of issuance of Summons for Directions to convene a meeting, though

the Company Judge has to apply its mind, prima facie, on the genuineness

of  the  Scheme,  basically  the  entire  exercise  is  to  verify  whether  the

numerous conditions prescribed in Rule 69 are satisfied read with Form 33

and Form 34.

In the impugned judgment, reliance is placed on the earlier judgment

of the Allahabad High Court in the case of Hind Auto Indo Ltd.  v.  M/s

Premier Motors (P) Ltd. reported in AIR 1970 Allahabad 165. From a bare

reading of that judgment we find that the said case related to interpretation

of Section 394A of the Companies Act with which we are not concerned in

this case. Be that as it may, there are observations in the said judgment, with

respect, with which we do not agree, both on the interpretation of Rule 67

and  69  on  one  hand  as  also  on  the  basis  of  the  practical  effect  of  the

interpretation given by the High Court in the present case. If at the threshold

stage of directions to convene a meeting hearing is required to be given to

the  members  as  held  in  the  impugned  judgment  the  scheme  of  the

Companies  (Court)  Rules  1959  will  become unworkable.  For  the  above

reasons, with respect, we disagree with the view expressed by the Allahabad

High Court in the case of Hind Auto Indo Ltd. (supra) and we agree with

the judgment of the Bombay High Court in the case of Sakamari Steel &

Alloys Ltd. (supra).

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For  the  aforestated  reasons,  we  allow  these  civil  appeals.

Consequently, the impugned judgment is set aside with no order as to costs.

………………………..J. (S. H. KAPADIA)

………………………..J. (AFTAB ALAM)

New Delhi, December 4, 2008

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