DR.

RAM MANOHAR LOHIYA

NATIONAL LAW UNIVERSITY

B.A. LL.B. (Hons.)

CORPORATE LAW-II
FINAL DRAFT

Topic: Case Analysis - MIHEER H. MAFATLAL v.

MAFATLAL INDUSTRIES LTD.

Submitted to:

Submitted by:

Dr. Manish Singh

Yash Arya

Asst. Professor (law)

Roll no.: 156

Section- B
Semester VI

Contents
INTRODUCTION............................................................................................3
BACKGROUND.............................................................................................4
DESCRIPTION OF THE CASE.........................................................................5
FACT-.........................................................................................................5
CONTENTION............................................................................................7
JUDGEMENT-.............................................................................................8
ANALYSIS...................................................................................................14
CONCLUSION.............................................................................................19
BIBLIOGRAPHY...............................................................................................
.........................20

INTRODUCTION
This case deals with the amalgamation of two companies mafatlal industries limited and
mafatlal fine spinning and manufacturing limited. Though the word amalgamation has not
been defined in the Companies Act, 2013, amalgamation is defined as a simple arrangement
or reconstruction of business. It is a process that involves combining of two or more
companies as either absorption or as blend. Two or more companies can either be absorbed
by an entirely new firm or a subsidiary powered by one of the basic firm. In such cases all the
shareholders of the absorbed company automatically become the shareholders of the ruling
company as the amalgamating company loses its existence. All the assets and liabilities are
also transferred to the new entity. Amalgamation has given different forms to different
actions in due course of the merger taking place. It can either be classified in the nature of
merger or in the nature of purchase. If the process takes place in the nature of merger then the
all assets, liabilities, and shareholders holding not less than 90% of equity shares are
automatically transferred to the new company or the holding company by virtue of the
amalgamation. When amalgamation takes place in nature of purchase then the assets and
liabilities of the company are taken over by the ruling company. All the properties and
characteristics of amalgamating company should vest with the other company. Even the
shareholders holding shares not less than 75% should transfer their shares to the transferee
company. In such a case any company does not purchase the business resulting in a takeover,
the transferor company does not completely lose its existence.
The scheme of amalgamation was finalised between mafatlal industries limited (MIL) and
mafatlal fine spinning and manufacturing limited (MFL). The director of the respondentcompany MIL and transferor-company MFL approved the proposal for amalgamation. 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. Bombay High Court sanctioned the said Scheme on behalf of transferorcompany, 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. Nine objections were raised by the
3

appellant, as ultimately only four objections have survived which are 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, The Scheme as
proposed was unfair to the minority shareholders represented by the appellant, 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, 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 theCompany
Court. Learned Single Judge over-ruled these objections The Division Bench of the High
Court so now the appeal has come before Supreme Court.

BACKGROUND
Importance of this case lies in fact that it removed many confusions which were prevailing in
corporate field for long time like what is the role of court while according a sanction to the
scheme of merger and amalgamation, whether material interest has to be disclosed & how to
determine what is material interest etc. 1. The court while sanctioning the scheme must
ascertain the bona fide of the scheme. In Bhagwan Singh & Sons Private Limited v.
Kalawati & Others2, sanction was refused for the scheme since its primary motive was to
defeat the claims of certain creditors who had obtained decrees against the company.
Similarly, In Re Wood Polymer3, the Gujarat High Court refused to sanction the scheme
even though it had received no objection from shareholders, members, creditors or even the
official liquidator, on the grounds that it was ostensibly for the sole purpose of tax avoidance.
Later in the seminal case of Miheer Mafatlal v. Mafatlal Industries 4, the Supreme Court,
while enumerating factors which would enter the consideration while according sanction
under Section 391or 394, not found to be violative of any provision of law and is not
contrary to public policy. As against the general belief that directors special interest need not
1Giri S. Pratap, Investment Banking, 45-49 (2nd ed., Tata Mcgraw Hills, 2013).
2 Bhagwan Singh & Sons Private Limited v. Kalawati & Others (1986) 60 Comp. Cas. 94.
3 In Re Wood Polymer [1977] 109 I.T.R. 177 (Guj).
4 Miheer Mafatlal v. Mafatlal Industries A.I.R. 1997 S.C. 506.
4

be disclosed under section 393(1)(a) it has been held that under section 393 disclosure of
material interest of director is to be made when effect of proposed scheme is different from
the effect on the like interest of others persons. If the proposed scheme is to cover up the
deeds of the director than there are chances that scheme may not be sanctioned 5. So law in
this regard was well settled by Supreme Court in Miheer Mafatlal v. Mafatlal Industries
where the court explained that interest which is required to be specified and communicated to
the voters must be directors must be directors special interest different from that of other
members. The scheme which is put to vote must have an effect on the interest of director.
Dealing with the question of the scope of company courts jurisdiction in case of mergers
where prevailed a lot of confusion, the Supreme Court held that, the sanctioning court has
to see that the scheme (of merger) as a whole is found to be just, fair and reasonable from
the point of view of reasonable men of business taking a commercial decision beneficial to
the class represented by them for whom the scheme is meant6. Court answering this
question said 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 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. In
CWT v. Mahdeojalan7 court talked about yield method and earning method while
calculating exchange ratio but court in Miheer Mafatlal v. Mafatlal Industries settled the
law saying that valuation of company share is highly technical matter so ratio calculated by
the expert and approved by shareholder of both the company and sanctioned by court is an
ideal exchange ratio.
5Asif Basha Akbar, Critical Issues in Corporate Law, (Sunburn Publishers 2011).
6 Miheer Mafatlal v. Mafatlal Industries A.I.R. 1997 S.C. 506 47 at 15.
7CWT v. Mahadeojalan 1972 C.T.R. (S.C.) 395.
5

DESCRIPTION OF THE CASE

FACTsThe respondent-company MIL which was the petitioner before the learned Single Judge has
its registered office at Ahmedabad in Gujarat State. The transferor-company MFL is proposed
to be amalgamated with the respondent-company MIL under the following circumstances and
for the reasons like The proposed amalgamation will pave the way for batter, more efficient
and economical control in the running of operation, Economies in administrative and
management costs will improve in combined profitability, The amalgamated company will be
able to source and absorb new technology and spend on Research and Development, Market
Surveys etc. More comprehensively. The director of the respondent-company MIL and
transferor-company MFL approved the proposal for amalgamation, The directors of both the
companies of the opinion that suchamalgamation was in the interest do both the companies. It
has to be mentioned at this stage appellant who has objected to the amalgamation is himself
one of the directors of the transferor-company being MFL. The corresponding application on
behalf of the transferor-company for sanctioning this very Scheme ofAmalgamation 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.
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, it is at this stage that the appellant who was one of the shareholders of the transfereecompany filed his objection to the Scheme of Amalgamation moved under Section 391 of the
Act. Nine objections were raised by the appellant, as ultimately only four objections have
survived. 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
6

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. Learned
Single Judge, over-ruled these objections. 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. So now matter has come to Supreme Court.
CONTENTION
it was contended by the appellant that 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. He contended that 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. 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 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. On the other hand it was contended by
respondent 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.
7

On second issue it was contended by the appellant 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. 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. It was contended by the defendant 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.
Arguing on third issue appellant argued that during voting minority was suppressed and
separate meeting of minority shareholder was need to be called as they formed separate class
because 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 but it was contended by the respondent that 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.

Arguing on last issue it was contended by the appellant 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 on the other hand it was argued by
the respondent that they obtained an expert opinion while formulating scheme. But instead
appellant argued that court should obtain a fresh expert opinion to determine exchange ratio.
JUDGMENT8

Court before deciding the issues posed before it delved into the scope of power of company
court while sanctioning the scheme of merger and amalgamation as per the provisions of
Section 391 read with Section 393 of the Act. 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 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 Section391 has disclosed all
the relevant matters mentioned in the proviso to Sub-section (2) of that Section. 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. Court further said that 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.
Further dealing with the question that 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
9

creditors or members or their respective classes have approved the scheme as required by
Section 391 Sub-section (2). Court said 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 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. Court held that 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. Lastly court said 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; 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.
dealing with the first issue while deciding first issue whether not placing of special interest of
director before shareholder vitiated their consent court firstly discussed that 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.

10

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.
Than court proceeded to decide the issue in point by saying that 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 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 Division Bench.
Court while deciding second issue court said 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
11

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 Arvind Mafatlal on the one hand had the appellant-objector on the
other. 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.
While dealing with third issue court discussed relevant provisions of company act, 1956
namely section 82 and 86. 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. Court further went on to say 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.
Dealing with the last issue court saidthat the appellant himself as a director of that transferorcompany gave green single to the Scheme and to this very ratio of exchange of shares.
Appellant then argued that the proper exchange ratio would be one share of transfereecompany 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
12

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 concerned. Than appellant facing difficulty argued that 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. Court than summed up by saying that 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. Court cited Kamala Sugar Mills
Limited where it was held that Once the exchange ratio of the shares of the transfereecompany 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.

ANALYSIS
According to me courts decision is appropriate because in this judgement court has put a lid
on several contentious issues in arena of merger and amalgamation. There was one question
of law which court had to decide was what is scope of power of company court in sanctioning
the scheme of merger and amalgamation. Court has rightly held that once the scheme is
approved by majority of shareholders than court jurisdiction is merely supervisory not to sit
as appellate court on the scheme. This is fair enough because ultimately court is not any
commercial body or have any expertise in field of commerce so ultimately it is up to the
shareholder to decide whether scheme is in the best interest once it is done court is not left
with much scope to interfere because than court have to just look whether scheme is fair to
the minority and not repugnant to the public policy. Other question decided by court were
13

merely question of fact where also court has adequately backed his reasoning while deciding
them. court decision is appropriate becomes clear from the fact that up till this case has been
cited in around 144 cases i.e. in Hindustan Unilever & Others v. State of Maharashtra 8
court relying upon the this case said court should not interfere with judgement of shareholder
if they have sanctioned the scheme with their eyes wide open even if in view of court better
scheme of merger and amalgamation could have been framed. It was also cited by supreme
court in Meghal Home Pvt. Ltd. v. Shree Nivas Girni K.K. Samiti and Others 9 as well
where the Court placed its reliance on the decision given by the Supreme Court in Miheer H.
Mafatlal v. Mafatlal Industries Ltd. , where the Court has laid down various parameters for
sanctioning a scheme10. On the expression language of Section 391(1) it becomes clear that
where a compromise or arrangement is proposed between a company and its members or any
class of them has to be convened. This clearly pre-supposes that if the scheme of arrangement
or compromise is offered to the members as a class and no separate scheme is offered to any
sub-class 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. Similarly in
American remedies limited this decision was relied upon by Madhya Pradesh high court
where scheme was sanctioned by majority only one voted against the scheme while deciding
that it is up to the majority of shareholder to accept the scheme as a whole including
exchange ratio and court cant interfere with the decisions of shareholders.
Importance of this decision lies in fact that lot of things which were unclear in old companies
act that is to say there was lot of gap in language of old companies act which court filled in
this case and subsequently when new companies act is passed that company act, 2013 lot of
things which were said or decided in this case has been incorporated in the present companies
act recently passed by parliament i.e. appellant in present case argued 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
8 Hindustan Unilever & Others v. State of Maharashtra A.I.R. 2004 S.C. 326.
9Meghal Home Pvt. Ltd. v. Shree Nivas Girni K.K. Samiti & Others A.I.R. 2007 S.C. 3079.
10Institute of Company Secretaries of India, Corporate Restructuring and Insolvency (Mar 15, 2016,
10:50 PM), http://www.icsi.in/Study%20Material%20Professional/CRI.pdf.
14

Scheme was circulated to the members the majority vote became vitiated. So court decided
that scheme of merger and amalgamation will not have any impact on interest of director but
court said if any scheme have any impact on special interest of director than it needs to be
disclosed to shareholder for their vote. So point here is that in company act, 1956 it was not
explicitly mentioned that special interest of director has to be disclosed so court in new
company act that is company act, 2013 there is specific provision section 230(3) which says
Where a meeting is proposed to be called in pursuance of an order of the Tribunal under subsection (1), a notice of such meeting shall be sent to all the creditors or class of creditors and
to all the members or class of members and the debenture-holders of the company,
individually at the address registered with the company which shall be accompanied by a
statement disclosing the details of the compromise or arrangement, a copy of the valuation
report, the effect of the compromise or arrangement on any material interests of the directors
of the company etc. so now it has been expressly mentioned in company act, 2013 that any
impact on special interest of direct by scheme of merger and amalgamation has to be
disclosed to the shareholders so that their consent is not vitiated.
Section 231(a) has been incorporated in company act, 1956 which says Where the Tribunal
makes an order under section 230 sanctioning a compromise or an arrangement in respect of
a company, it shall have power to supervise the implementation of the compromise or
arrangement. This provision is clearly saying that court only have supervisory jurisdiction
over the scheme. This provision is the direct manifestation of what court has court has
decided in this case about scope of company court in sanctioning the scheme and whether
court has supervisory jurisdiction or it sits in appeal over the scheme? Court said 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 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.
Another section 232(2) (d) which says Where an order has been made by the Tribunal under
sub-section (1), merging companies or the companies in respect of which a division is
proposed, shall also be required to circulate the following for the meeting so ordered by the
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Tribunal, namely one thing which is mentioned is the report of the expert with regard to
valuation; if any. Though they have not made it compulsory to have this report of expert as an
,mandatory requirement but this is also the result of the ruling in this case where it was
contended before the that exchange ratio was not fair to the appellant than court said it is
commercial decision of the shareholder who have endorsed the scheme it leaves with a
limited discretion because it was contended by the respondent that there was nothing wrong
with the exchange ratio 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 and court
accepted the same. So basically even if there is no there is no expert opinion attached no
problem but if attached than it leaves court with no discretion to reject the same until and
unless opposite party comes up with an another expert ratio by another expert proving that
former one is wrongly calculated.
Last provision in which the findings of mafatlal case are reflected is section 233(5) which
says that ) If the Central Government after receiving the objections or suggestions or for any
reason is of the opinion that such a scheme is not in public interest or in the interest of the
creditors, it may file an application before the Tribunal within a period of sixty days of the
receipt of the scheme under sub-section (2) stating its objections and requesting that the
Tribunal may consider the scheme under section 232. This point was also made clear by court
when it said that 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. Further court held that 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. So at the end we can say that this decision has significantly
influenced the existing law.
According to me court has adequately justified its reasoning while deciding each of the four
issues like dealing with first issue whether directors were required to mention their pending
litigation with appellant to the shareholders and whether not placing it vitiated the consent of
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shareholders or not? Court wisely answered it in negative because it may also be kept in view
that the explanatory statement no way emphasised that it is the management of the transfereecompany 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. Second
issues decided by court that when 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. Court rightly decided this issue in negative saying that 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 which was not done in this case. Court cited Hellenic and General Trust
Limited where it was held 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. Similarly
third issue where court decided appellant didnt form the separate class of shareholder so
there was no need of calling a separate meeting for him court has given its reasoning for the
same apart from that 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. 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
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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. Court while deciding last issue said that exchange ratio was
fair and reasonable court was perfectly right because exchange ratio was approved by
shareholders furthermore it was calculated by expert and approved by ICICI bank and
respondent didnt produce any alternative expert opinion to support his claim so court was
right in deciding this point in negative.
So at last I can say that court in this case considered every issue while deciding them and
court has given its reasoning why deciding in particular way and the reasoning is backed by
statutory provision and case laws.

CONCLUSION
My conclusion is that this decision by the honourable supreme is landmark decision in field
of property law because it put a lid on many controversies in corporate field like what is the
jurisdiction of company court in sanctioning the scheme, whether court jurisdiction is merely
supervisory or it sits in appeal over the scheme, whether directors material interest needs to
be disclosed if yes than under what circumstances etc. another reason why this judgement is
landmark is that it has significantly influenced the existing law that is company act, 2013.
Several provisions of this act reflects the findings of this decision like sec.230(3), 231(a),
232(2)(d), 233(5) and they makes many things clear like courts jurisdiction is merely
supervisory court does not sit over the scheme in appeal, if director have any special interest
tan they need to be disclosed to the shareholders, optional requirement of exchange ration
being approved by shareholder should also have backing of expert which will leave court
with little discretion but to except the scheme, last provision talks about court can reject the
scheme on ground of public policy. After seeing that decision has significantly influenced the
new company act court has done an excellent job by not only providing reasoning for its
decision but also backing it by significant provisions and case laws.

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BIBLIOGRPAHY:BOOKS:

Avtar Singh, Company Law, (15th ed., Eastern Book Company 2009).
Kershaw, Company Law in Context, (1st ed., Oxford University Press 2007).
C.R. Dutta, The Company Law, (6th ed., Lexis Nexis 2008).
Mayson, French & Ryan, Company Law, (26th ed. Oxford University Press).

WEB RESOURCES:

Emins Legal, Draft Rules Companies Act, 2013 (Mar 15, 11:20 PM),
www.corporatelawreporter.com/.../draft-rules-companies-act-2013.

Institute of Company Secretaries of India, Corporate Restructuring and Insolvency

(Mar 15, 2016, 10:50 PM), http://www.icsi.in/Study%20Material
%20Professional/CRI.pdf.

CASE LAW:

Bhagwan Singh & Sons Private Limited v. Kalawati & Others (1986) 60 Comp. Cas.
94.

In Re Wood Polymer [1977] 109 I.T.R. 177 (Guj).

Miheer Mafatlal v. Mafatlal Industries A.I.R. 1997 S.C. 506.

CWT v. Mahadeojalan 1972 C.T.R. (S.C.) 395
Hindustan Unilever & Others v. State of Maharashtra A.I.R. 2004 S.C. 326.
Meghal Home Pvt. Ltd. v. Shree Nivas Girni K.K. Samiti & Others A.I.R. 2007 S.C.

3079.

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