Magnaquest Solutions - AP HC - 2007.docx

7/28/2019 Magnaquest Solutions - AP HC - 2007.docx

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print Print it on a file/printer Andhra High CourtIn Re M/S. Magnaquest Solutions ... vs !Counsel ForThe Petitioner: Sri ... on 21 September, 2007

THE HON'BLE MR JUSTICE RAMESH RANGANATHAN

Company Petition No. 28 of 2007

21-09-2007

In re M/s. Magnaquest Solutions Private Limited, a companyincorporated under the Companies Act, 1956 having its Registered

Office at 8-2-684/BP, Plot No. 1523 & 1524, Druga Enclave, Road No.12, Banjara Hills,Hyderabad - 500 034, rep., by its DirectorMr. VijayKumar Debbad.

!Counsel for the petitioner: Sri V.S. Raju

^Counsel for the Official Liquidator: Sri M. Anil Kumar

:ORDER:

In this petition, filed under Sections 391 and 394 of the CompaniesAct, 1956, the petitioner-transferor company prays that the scheme ofamalgamation, as approved by the respective Board of Directors of thetransferor and transferee companies, be sanctioned and confirmed bythis Court so as to bind all members, creditors and employees of thepetitioner, for an order that the petitioner be dissolved without theprocess of winding up, for an order that the petitioner shall, withinthirty days of its receipt, cause a certified copy of the order to be

delivered to the Registrar of Companies for registration, that on suchcertified copy being delivered, the Registrar of companies should takenecessary consequential action in respect of the petitioner includingits dissolution, and that the parties to the scheme, or other personsinterested, be at liberty to apply to the High Court for any directionthat may be necessary to carry out the scheme of amalgamation.


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The petitioner was incorporated in the State of Andhra Pradesh on18.10.1999 with its registered office in Hyderabad. Its share capital ason 31st March, 2006 was Rs.15,00,000/- divided into 1,50,000 equityshares of Rs.10/. The entire share capital is fully issued, subscribed

and paid up and is entirely held by the transferee company. Its mainobjects are to carry on the business of manufacture, import, exportand to otherwise deal in all kinds of computers, calculators, microprocessors, electronic and electrical apparatus, software equipment,etc. The petition gives details of the provisional financial summary ofthe transferor company as on 31.12.2006 according to which the valueof the current assets is Rs.1,00,12,261/-, the current liabilities andprovisions are for Rs.17,03,712/- and its profit and loss account shows

a profit of Rs.83,08,541/-.The Transferee company was initially incorporated as a private limitedcompany on 14.10.1997 under the name and style of M/s. ZeusSoftware Private Limited. Its name was later changed to M/sMagnaquest Technologies Private Limited. Its registered office is inHyderabad. The authorised share capital of the transferee as on31.03.2006 was Rs.1,00,00,000/- divided into 10,00,000 equityshares of Rs.10/- each and the entire share capital is issued,

subscribed and fully paid up. The main objects of the transferee is alsoto manufacture, import, export and otherwise deal in all kinds ofcomputers, calculators, micro processors etc., Details of the audited

balance sheet of the transferee as on 31.03.2006 are furnished whichreflect that, while its current assets, loans and advances areRs.6,05,58,332/-, its current liabilities and provisions areRs.87,49,540/-.

The petitioner submits that the Board of Directors of the transferor

and the transferee companies, in their respective meetings held on29.01.2007, had approved the scheme of amalgamation of thetransferor with the transferee with effect from 01.04.2007 subject toapproval/consent of the High Court. The Petition details some of thesalient features of the scheme of amalgamation. The scheme, amongseveral features, also provides that, upon sanction by the High Court


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under Section 394 of the Act and on its becoming effective, thetransferor company would be dissolved without the process of windingup with effect from the appointed date or such other date as may befixed by the Court. This Court, by order dated 09.03.2007, directed

publication of the petition in Andhra Jyothi (telugu daily) and NewIndian Express (English Daily) (Hyderabad editions), and directednotice to the Central Government as well as to the Official Liquidator.

A brief reference can usefully be made to the relevant provisions of theAct and the Rules. Under Section 391 (1) of the Companies Act, whileexamining a proposal of compromise or arrangement (a) between acompany and its creditors or any class of creditors or (b) between acompany and its members or any class of members, the Court has the

power, to order that a meeting of the creditors or class of creditors orof the members or class of members be held and to issue directions onthe manner in which such a meeting should be conducted. UnderSection 391(2), if a majority of the creditors or class of creditors, ormembers or class of members, representing three-fourth in value ofthe persons voting in the meeting, approve the compromise orarrangement it would, on its being sanctioned by the Court, bind allthe creditors, all the members and the company. Before sanctioning a

scheme of compromise or arrangement, the proviso to Section 391(2)requires the Court to satisfy itself that the company hasdisclosed allrelevant material facts, such as its latest financial position, the latestauditor's report on its accounts, pendency of investigation proceedingsunder Sections 235 to 251 etc. A certified copy of the order passed bythe Court, sanctioning the compromise or arrangement, is required to

be filed with the Registrar of Companies until which the order wouldhave no effect. Under Section 394(1), when a compromise orarrangement has been proposed in connection with a scheme for theamalgamation of two or more companies, and thereunder the whole orany part of the undertaking, property or liabilities of the transferorcompany is to be transferred to a transferee company, the court may,

by the order sanctioning the compromise or arrangement, makeprovision for (i) the transfer to the transferee company of the whole orany part of the undertaking, property or liabilities of the transferor


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company; (ii) the allotment or appropriation by the transfereecompany of any shares in that company which, under the compromiseor arrangement, are to be allotted by that company to or for anyperson; (iii) the continuation by or against the transferee company of

any legal proceedings pending by or against the transferor company;(iv) the dissolution without winding-up of the transferor company; (v)provision to be made for any person who, within such time and in suchmanner as the court directs, dissents from the compromise orarrangement; and (vi) such incidental, consequential andsupplemental matters as are necessary to ensure that theamalgamation is fully and effectively carried out. Under the secondproviso, no order of dissolution of any transferor company under

Clause (iv) shall be made by the Court unless the official liquidatorhas, on the scrutiny of books and papers of the company, made areport to the court that the affairs of the company have not beenconducted in a manner prejudicial to the interest of its members or topublic interest. Under sub-section (2), where an order made underSection 394 provides for the transfer of any properties or liabilities,that property shall be transferred to and vest in and the liability shall

be transferred to and become the liabilities of the transferee company.Sub-section (4)(a) of Section 394 defines "property" to include

property, rights and powers of every description and "liabilities" toinclude duties of every description. Under clause (b), while atransferee company does not include any company, other than acompany within the meaning of the Companies Act, the transferorcompany includes any body corporate whether a company or not.Section 394-A requires the Court to give notice of every applicationmade to it, under Sections 391 or 394, to the Central Government andtake into consideration representations, if any, made to it by that

Government before passing any order. Rules 67 to 87 of theCompanies (Court) Rules, 1959 are the rules relating to compromise orarrangement under Sections 391 to 394. Under Rule 69, upon hearingof the summons, the judge shall give such directions as he may thinknecessary in respect of (1) determining the class or classes of creditorsand/or of members whose meeting or meetings have to be held forconsidering the proposed compromise or arrangement; (2) fix the time


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and place of such meeting (3) appoint a chairman for the meeting (4)fix the quorum and the procedure to be followed at the meetingincluding voting by proxy; (5) the procedure for determining the valueof the creditors and/or the members, or the creditors or members of

any class whose meetings have to be held; (6) notice to be given of themeeting or meetings and advertisement of such notice; and (7) thetime within which the chairman of the meeting is to report to theCourt the result of the meeting. The order, made on the summons,should be in Form No.35 with such variations as may be necessary.Rule 73 requires notice of the meeting to be given to the creditorsand/or members or to the creditors or members of any class as thecase may be, to be in Form No.36 and to be sent to them individually

by the Chairperson appointed for the meeting not less than 21 cleardays before the date fixed for the meeting. The notice is required to beaccompanied by a copy of the proposed compromise or arrangementand the statement required to be furnished under Section 393. Rule 74relates to advertisement of the notice of the meeting. Rule 75 requiresevery creditor or member entitled to attend the meeting to befurnished by the company, free of charge and within 24 hours of arequisition being made, with a copy of the proposed compromise orarrangement together with a copy of the statement required to be

furnished under Section 393. Rule 77 requires that a decision in themeeting, held in pursuance of the order under Rule 69, on allresolutions be ascertained by taking a poll. Rule 79 provides that

where a compromise or arrangement is agreed to, with or withoutmodification, as provided by sub- section (2) of Section 391, thecompany shall within 7 days of the filing of the report by theChairman, present a petition to the court for confirmation of thecompromise or arrangement. Where a compromise or arrangement is

proposed for the purpose of, or in connection with, a scheme for theamalgamation of two or more companies, the petitioner is required topray for appropriate orders or directions under Section 394. UnderRule 80, the Court is required to fix a date for the hearing of thepetition and the notice of hearing is required to be advertised in thesame newspapers in which the notice of the meeting was advertised orin such other papers as the court may direct, not less than 10 days


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before the date fixed for hearing. Under Rule 81, where the Courtsanctions the compromise or arrangement, the order shall includesuch directions in regard to any matter and such modifications thatthe Judge may think fit. A certified copy of the order is required to be

filed before the Registrar of Companies within 14 days or within suchother time as may be fixed by the Court. The order is required to befiled in Form-41 with such variations as may be necessary. Rule 83relates to directions at the hearing of the application and, thereunder,upon hearing of the summons, the Court may make such order or givesuch directions as it may think fit as to the proceedings to be taken forthe purpose of reconstruction or amalgamation as the case may beincluding, where necessary, an enquiry as to the creditors of the

transferor company and the securing of the debts and claims of anydissenting creditor, in such manner as the Court may deem just. Rule84 requires the order under Section 394 to be in Form-42 with such

variations as the circumstances may require. APPROVAL OF THESCHEME OF AMALGAMATION BY THE COURT: SCOPE OFENQUIRY: Before sanctioning a scheme of arrangement the Courtmust be satisfied that the statutory provisions are complied with, thatin case a meeting, of the members or a class of members or of thecreditors or a class of creditors, is called for, the class is fairly well

represented and that the scheme of arrangement is such as a man ofbusiness would reasonably approve. It is the commercial wisdom ofthe parties to the scheme, who have taken an informed decision aboutthe usefulness and propriety of the scheme supporting it by therequisite majority vote, that has to be kept in view by the Court. TheCourt would not act as a court of appeal and sit in judgment over theinformed view of the parties to the compromise as it has neither theexpertise nor the jurisdiction to delve deep into the commercial

wisdom exercised by the creditors and members of the company whohave ratified the scheme by the requisite majority. The CompanyCourt's jurisdiction to that extent is peripheral and supervisory andnot appellate. The supervisor cannot ever be treated as the author orthe policy-maker. The propriety and the merits of the compromise orarrangement has to be judged by the parties who, as sui juris withtheir open eyes and fully informed about the pros and cons of the


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scheme, arrive at their own reasoned judgment and agree to be boundby such a compromise or arrangement. The Court cannot scrutinisethe scheme to find out whether a better scheme could have beenadopted by the parties. (Miher H. Mafatlal Vs. Mafatlal Industries

Ltd1). In the present case, the scheme of arrangement is between thetransferor company and its members. The scheme of arrangementenvisages amalgamation of the transferor, a wholly owned subsidiaryof the transferee, with the transferee company. While sanction of thescheme of amalgamation is, ordinarily, sought for both by thetransferor and the transferee companies by way of separate petitions,

before the High Court, within whose territorial jurisdiction theregistered offices of the respective companies are situated, in the

present case, the petition seeking sanction of the Scheme ofarrangement has been filed only by the transferor company and not bythe transferee. That, in cases where a wholly owned subsidiary issought to be amalgamated with its holding company, no separatepetition need be filed by the transferee-holding company is wellsettled. (In Re Nebula Motors Ltd2; Andhra Bank Housing FinanceLimited, Hyderabad Vs. M/s. Andhra Bank - 3 (2003) 3 ALD 654)

Since the scheme of arrangement is between the transferor company

and its members, Section 391(1) requires the Court to direct that ameeting of the members be called for. This Court, by order in C.A.289of 2007 dated 20.2.2007, had dispensed with the requirement ofholding a meeting of the shareholders as all shareholders hadsubmitted their affidavits/letters of consent to the proposed scheme ofamalgamation.

SCHEME OF ARRANGEMENT BETWEEN THE COMPANY AND ITSMEMBERS: SHOULD A MEETING OF THE CREDITORS BE HELD?

While the sole secured creditor of the transferor company, M/sCenturian Bank of Punjab, for Rs.44,021/- and its unsecured creditorsfor Rs.93,98,865/- have given individual letters of consent to thescheme of amalgamation, the sundry creditors, as reflected in theBalance sheet under the head "current liabilities", have not.


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A creditor, who has a debt due from the transferor company, would,on the scheme of amalgamation being sanctioned, be required to looknot to the transferor for repayment of his dues but to the transferee

with whom he neither had any dealings in the past nor privity of

contract prior to its substitution in the place of transferor. In a givencase, the transferee company may have negative assets or may nothave sufficient liquidity to repay the creditor, as per the original termsagreed between him and the transferor company. Whether he would

be adversely affected by being required to deal with the transferee, insubstitution of the transferor, is a matter of perception of the creditor.(Zee Interactive Multi Media Ltd., In re4, Mayfair Limited and ZodiacClothing Co. Ltd In re5, Union of India Vs. Asia Udyog Pvt. Ltd6).

On the question whether a meeting of the creditors is statutorilyrequired to be called for, even in a scheme of arrangement between thecompany and its members, one view is that the creditors are notentitled, as of right, to participate in the process of consideration ofsanction of the scheme, as the Companies Act does not contain aspecific provision for notice being given to the creditors at any stageeither prior to the making of the order or subsequent thereto, except inso far as the creditors may have notice of it by public advertisement,

(Asia Udyog Private Limited6), and that the legislature has cast a dutyon the Court to ascertain whether the Scheme affects the interests ofthe creditors to such an extent that holding of their meeting isessential and, if the Court were of the view that the interests of thecreditors are adversely affected, it could refuse to sanction the schemeunless their consent has been obtained. (Ansal Properties andIndustries Ltd., In re7).

Another facet of this view is that, under Section 391 of the Act, a

compromise or arrangement is either between a company and itscreditors or between a company and its members. An arrangement, inthe nature of amalgamation, is the result of an agreement between theamalgamating company and its members, as well as a correspondingagreement between the transferee company and its members, andthere is, therefore, no provision for the participation of persons other


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than the members of the two companies to vote on an arrangement ofamalgamation proposed between a company and its members. (NavBharat Ferro Alloys In re8; Mafatlal Industries Ltd., In re9;Coimbatore Cotton Mills Ltd and Lakshmi Mills Co. Ltd., In re10;

Telesound India Ltd., In re11 and Nav Chrome Ltd., In re12)

A slightly different view was taken by D.G. Karnik. J of the BombayHigh Court, in Re: ICICI Bank Limited13. To quote:-

".....I have my own doubt about the view taken by the Delhi High Courtin expressing that the creditors have no right to participate in theprocess of consideration of the Scheme of Arrangement between theCompany and its members. Section 391(1) gives a discretion to the

Court to convene a meeting of the creditors or any class of them. TheCourt would exercise the discretion by convening a meeting ofcreditors if the creditors are likely to be adversely affected by anarrangement between the Company and its members. Attending themeeting and voting are steps of participation in the process ofconsideration of the Scheme. ....

........I am of the firm view that while considering any Scheme ofArrangement or Compromise proposed under Sections 391to 394 ofthe Companies Act the Court is duty-bound to consider the interests ofall the creditors. What importance should be given to the fact that thecreditors are likely to be affected would vary from case to case but theJudge would certainly treat whether the creditors are adverselyaffected or not as the relevant circumstance. How then Court is toascertain as to whether the creditors are adversely affected? If thecreditors have no right of hearing at the time of hearing of the petitionunder Section 391 as held by Delhi High Court and this Court, (I have

my own doubts about the correctness of this view) the only way ofascertaining whether the creditors are affected or not would bethrough the wishes of the creditors which may be expressed by them ina meeting which the Court undoubtedly is entitled to convene underSub-section (1) of Section 391. Therefore, the Court would exercisediscretion as a matter of course to convene meeting of the creditors of


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the Company under Sub-section (1) of Section 391 unless the Court isprima facie satisfied that the interests of the creditors are not likely to

be adversely affected by the Scheme. I am of the opinion that if ananomaly, as pointed out in Telesound India Limited, by the Delhi High

Court exists in Section 391, the Courts would not fold their hands andwait for the Legislature to provide a cure, but would exercise theirdiscretion under Sub-section (1) of Section 391, almost in every case in

which creditors are likely to be affected, and convene a meeting of thecreditors and ascertain their wishes by looking not only at theResolutions passed in their meeting but looking at the entire report ofthe Chairman of the meeting which is expected to contain the detailsof the proceeding in brief and the views expressed by the creditors in

the meeting........." (emphasis supplied)Can failure to hold a meeting of the creditors, in a scheme ofarrangement between the company and its members, be justified onthe ground that it is always open to the Court, on a bare perusal of theaudited financial statements placed before it, to ascertain whether ornot their interests are safeguarded? Would that not amount tousurping the rights of the creditors to decide for themselves whetheror not to approve the scheme? In the light of the settled legal position

that the Court has no power to usurp the rights of the class ofmembers or creditors to decide whether or not to approve the scheme,if the class whose interests are affected by the scheme, neither assentto nor approve of it in a meeting held in accordance with the statutoryprovisions and that the Court cannot confirm the scheme even if itconsiders that the class concerned has been fairly dealt with or that it

would have approved the scheme (Palmers Company Law), would theCourt be justified in examining the scheme and recording itssatisfaction that the interests of the creditors are not affected, whenthese are matters which the creditors should have been permitted toexamine and decide for themselves in a meeting to be called for thispurpose? If the jurisdiction of the Company Court, in examining ascheme of arrangement, is peripheral, supervisory and not appellate,since it does not have the expertise to delve deep into the commercial

wisdom of the members who have ratified the scheme by the


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prescribed majority, (Miheer H. Mafatlal1), on what basis would theCourt decide that, in the facts and circumstances of a given case, ameeting of the creditors or a class of them should or should not beheld to ascertain whether they approve of the scheme or not?

Section 391(1), enables the Court, on the application of a company or acreditor or a member of the company, to order a meeting of thecreditors/or the members "as the case may be" to be held andconducted in such a manner as the Court directs. Under Section391(2), if a majority representing 3/4th in value of thecreditors/members agree, in the meeting, for the compromise orarrangement, the scheme, on its sanction by the court, would be

binding on all the creditors/members "as the case may be" and also on

the company. The expression "as the case may be" finds place both insub-sections (1) and (2) of Section

391. If the words "as the case may be" in Section 391(1) are construedas requiring the Court to order the meeting of only the members, in aScheme of arrangement between the Company and its members, andonly a meeting of the creditors in a Scheme of arrangement betweenthe Company and its creditors, should the expression "as the case may

be" in Section 391(2) then not be read as to bind only the memberswhere a meeting of the members is held and only the creditors where ameeting of the creditors is held? The safeguard in the provision, of 3/4the members or creditors in value voting in the meeting to approve thescheme, is that the wishes of a majority of the class should prevail, andthe dissenting minority of 1/4th or less of the class should not bepermitted to derail the scheme of arrangement unless, of course, theCourt, on examining the scheme, finds that the objection of theminority is justified. If no meeting of the creditors is required to be

held, in a scheme of arrangement between the Company and itsmembers, then, in the absence of ascertaining whether 3/4th in valueof the creditors approve the scheme or not, would the Court be

justified in statutorily imposing such a scheme of arrangement on thecreditors, even though their consent has not been obtained or their

wishes ascertained? If it were held that not holding the meeting, and


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ascertaining the wishes of the creditors, would result in the scheme ofarrangement not to bind them, would the very purpose of sanctioningthe scheme by the Court not be defeated and approval of the schemenot be an exercise in futility? If, on the other hand, the view, that a

meeting of the creditors/members must necessarily be held in all casesirrespective of whether the scheme of arrangement is between theCompany and its members or the creditors, is accepted would that notrender the words "as the case may be" in Section 391(1) meresurplusage? These are several questions which need answers.

LIFTING THE CORPORATE VEIL: PERMISSIBLE IN CASESWHERE A HOLDING COMPANY AND ITS SUBSIDIARY AREINVOLVED:

It is, however, not necessary for us to seek answers to the aforesaidquestions in the present case, as a wholly owned subsidiary is soughtto be amalgamated with its holding company. Under Section 4(1)(a)and (b)(ii) of the Companies Act, a company shall be deemed to be thesubsidiary of another only if that other controls the composition of itsBoard of Directors or where the other company holds more than half,in nominal value, of its equity share capital. In the present case, the

entire nominal value of the equity share capital of the transferor isheld by the transferee.

The legal entity of the Corporation is separate from that of itsshareholders; it bears its own name and has a seal of its own; its assetsare separate and distinct from those of its members; it can sue and besued exclusively for its own purpose; its creditors cannot obtainsatisfaction from the assets of its members; the liability of themembers or shareholders is limited to the capital invested by them.

Similarly, the creditors or the members have no right to the assets ofthe Corporation. However the doctrine, that the Corporation or aCompany has a legal and separate entity of its own, has been subjectedto certain exceptions by the application of the fiction that the veil ofthe Corporation can be lifted and its face examined in substance. Thedoctrine of the lifting of the veil has been applied in five categories of


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cases: where companies are in the relationship of holding andsubsidiary (or sub-subsidiary) companies; where a shareholder haslost the privilege of limited liability and has become directly liable tocertain creditors of the company on the ground that, with his

knowledge, the company continued to carry on business six monthafter the number of its members was reduced below the legalminimum; in certain matters pertaining to the law of taxes andstamps, particularly where the question of "controlling interest" is inissue; in the law relating to exchange control; and in the law relating totrading with the enemy where the test of control is adopted. (TataEngineering and Locomotive Co. Ltd Vs. The State of Bihar14;Palmer's Company Law)

In DHN Food Distributors Ltd. Vs. London Borough of TowerHamlets15, Lord Denning quoted with approval the statement inGower's Company Law that:- "there is evidence of a general tendencyto ignore the separate legal entities of various companies within agroup, and to look instead at the economic entity of the whole group",

and observed that "this group is virtually the same as a partnership inwhich all the three companies are partners". He called it a case of

"three in one" - and, alternatively, as "one in three......". Goff, L.J. said: "This is a case in which one is entitled to look at the realities of thesituation and to pierce the corporate veil." The observations of Shaw,L.J. were: "Why then should this relationship be ignored in a situationin which to do so does not prevent abuse but would on the contraryresult in what appears to be a denial of justice?"

Similarly in Harold Holdsworth & Co. (Wakefield) Ltd. Vs. Caddies16it was argued that the subsidiary companies were separate legal

entities each under the control of its own board of directors, that inlaw the board of the holding company could not assign any duties toanyone in relation to the management of the subsidiary companies,and that, therefore, the agreement cannot be construed as entitlingthem to assign any such duties to the respondent. The argument wasrejected by Lord Reid with the observation: "This is too technical an


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argument", "This is an argument in re mercatoria , and it must beconstrued in the light of the facts and realities of the situation."

The aforesaid judgments, in which the corporate veil was lifted, were

quoted with approval by the Supreme Court in Delhi DevelopmentAuthority Vs. Skipper Construction Co. (P) Ltd17 and New HorizonsLimited Vs. Union of India18). In State of U.P. Vs. Renusagar PowerCo.19 the Supreme Court lifted the veil to hold that Hindalco, theholding company, and Renusagar Power Co., its subsidiary, should betreated as one concern and the power plant of Renusagar must betreated as the own source of generation of Hindalco and Hindalco

would be liable to payment of electricity duty on that basis. It wasobserved : ".......It is high time to reiterate that in the expanding

horizon of modern jurisprudence, lifting of corporate veil ispermissible. Its frontiers are unlimited. It must, however, dependprimarily on the realities of the situation. ... The horizon of thedoctrine of lifting of corporate veil is expanding......" (emphasissupplied)

Lifting the corporate veil, in cases where a wholly owned subsidiary isamalgamated with its holding company, would establish that the

creditor is, and has always been, dealing with the transferee companyde-facto though he is the creditor of the transferor company de-jure.In such limited cases of amalgamation, as the creditors' rights cannot

be said to be affected, holding of a meeting to ascertain their views,and obtain their consent to the scheme of amalgamation, may not benecessary.

Along with C.A.1420 of 2007, the audited Balance Sheet of thetransferor company, as at 31.3.2007, is filed. Sri V.S. Raju, learned

counsel for the petitioner would submit that the audited Balance Sheetof the transferee company as at 31.3.2007 has not yet been finalisedand that the latest available audited balance sheet is only as on31.3.2006. The audited balance sheet of the transferee, as at31.3.2006, would show that its current assets exceed its currentliabilities by Rs.5,18,08,792/-. While its profit for the year after taxes


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is Rs.98,01,565, the profit and loss a/c balance brought forward fromthe previous year is Rs.1,27,99,324 and the balance carried to theBalance sheet as Reserves and Surplus is Rs.2,26,00,889/-. TheReserves and Surplus of the transferee company as at 31.3.2006 is

Rs.4,40,83,653/-. The Balance sheet of the transferor company, as at31.3.2007, would show that its carry forward losses, as on that date, isRs.8,19,478/-. While the transferor company's profits before tax, forthe year ending 31.03.2007, is Rs.34,14,373/- the loss carried forwardfrom the previous years is Rs.39,72,350/- resulting in a loss ofRs.8,19,478/- being carried forward to the Balance sheet. Though thetransferor company has made profits for the year ending 31.3.2006and 31.3.2007, its profits are not significant enough to wipe off its

accumulated losses. While the net current assets of the transferorcompany, as on 31.03.2007, is Rs.25,22,747/-, the fact that itsaccumulated losses as at 31.03.2007 stands at Rs.8,19,478/-, ascompared to the profits made by, and the Reserves and Surplus of, thetransferee company, would show that its financial position is not asstrong as that of the transferee. It cannot, therefore, be said that thecreditors of the transferor company, (which is yet to wipe off itsaccumulated losses), would be adversely affected on amalgamation

with the transferee. Viewed in the light of the aforementioned facts,

the submission of Sri V.S.Raju, learned counsel for the petitioner, thatthe net worth of the transferee company is more than adequate toprotect the interests of the creditors of the transferor company cannot

be said to be without basis.

RELEVANT DATE UPTO WHICH INFORMATION REGARDINGTHE LATEST FINANCIAL POSITION AND THE LATEST AUDITEDBALANCE SHEET, SHOULD BE DISCLOSED.

Under the proviso to Section 391(2), the petitioner-company mustdisclose all material facts, including its latest financial position and thelatest auditors report on its accounts. The words "latest auditorsreport" connote the latest auditors report available or which shouldnormally be available at the time of filing of the petition. There willalways be a time gap between the date on which the auditor audits the


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accounts and prepares his report, the date on which the companypetition is filed and the date on which the petition is actually heard.The statutory requirement of submission of the latest auditor's report,stipulated in the proviso to sub-section (2) of section 391, would mean

the latest auditor's report for the period for which the accounts areaudited or ought to have been audited. In a given case the Court is notpowerless to ask for further details of the latest financial position as onthe date of the hearing of the petition, or as near to the date of thehearing of the petition, as is reasonably practicable. This is especiallynecessary when there is a long gap between the date of filing of thepetition and the date of its hearing. (Zee Interactive Multimedia Ltd.,In re4).

The petitioner - transferor company has submitted its audited BalanceSheet as at 31.03.2007, and the audited Balance Sheet of thetransferee company as at 31.3.2006 along with its schedules.

Accepting the submission of Sri V.S. Raju, learned Counsel for thepetitioner, that the audited Balance sheet and profit and loss accountof the transferee company, for the year ending 31.03.2007, has not as

yet been finalized, the requirement of furnishing the latest financialposition, and latest auditor's report on the accounts of the company,

must also be held to have been complied with. In the Petition, it isspecifically stated that there is no investigation pending under theCompanies Act. As such all the requirements of the proviso to Section391(2) must be held to have been satisfied.

REPORTS OF THE OFFICIAL LIQUIDATOR UNDER THE SECONDPROVISO TO SECTION 394(1) AND THE CENTRAL GOVERNMENTUNDER SECTION 394-A.

The Official Liquidator, in his report submitted under the secondproviso to Section 394(1), states that he had called for the statutory

books from the transferor company which were furnished, that Clause25 of the objects clause, incidental and ancillary to the attainment ofthe main objects of the Memorandum of Association of the transferorcompany, enables it to amalgamate, that adequate provision has been


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made for protecting the services of the employees, as the employees ofthe transferor company would now become the employees of thetransferee company as provided under Clause (5)(ii) of the Scheme,that under Clause 8(c) of the Scheme the unsecured loans extended by

the transferee to the transferor stand cancelled, that the relevantprovisions under the Companies Act have been complied with by thetransferor and that, on verification of the material papers, books andrecords made available to him by the petitioner, he is of the opinionthat the affairs of the transferor company do not appear to have beenconducted in a manner prejudicial to the interests of its members or topublic interest. As such the requirement of the second proviso tosection 394(1) is also satisfied.

The Registrar of Companies has filed an affidavit, on behalf of theCentral Government under Section 394-A, raising two objections tothe scheme of amalgamation (1) that the transferee had notapproached the High Court seeking dispensation of the meeting of thecreditors and that the scheme may be considered subject to productionof consent letters of the secured creditors of the transferee company,and (2) that Clause (10) of the Scheme, which contemplates combiningthe authorized capital of the transferor with the transferee, is

impermissible since the authorized capital is the notional limit uptowhich the company can increase its paid up capital, that two notionallimits cannot be clubbed together, that, since the authorized capital ofthe company is a liability, unlike other liabilities to be returned orrefunded, it would not come under the purview of transfer of liabilitiesunder the scheme of amalgamation, that the transferor and transfereecompanies are separate legal entities and, on amalgamation, it is onlythe transferor company which would be dissolved and the transfereecompany would continue to exist, that at this stage if the transferee, onaccount of the scheme of arrangement, increases its authorised capitalit has to comply with the provisions of Sections 94 and 97 of theCompanies Act, 1956 by filing the relevant returns with the Registrarof Companies with registration fee/filing fee, that the Companies Actdoes not specifically exempt the transferee company, on account of thescheme of arrangement, from payment of registration fee for increase


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of its authorized capital, that if the transferee company was allowed toincrease its authorized capital, on clubbing the authorized capital ofthe transferor company without any further act or deed ascontemplated in the Scheme, it would not only be against the

provisions of the Companies Act, 1956 but would also involvesubstantial loss to central government revenue, that clubbing of theauthorized capital of the transferor with that of the transferee cannot

be a part of the Scheme since Section 97 of the Companies Act, 1956requires compliance by payment of the registration fee with theRegistrar of Companies and does not require permission of the Court.

As noted above, the secured creditors and the creditors under the head"unsecured loans" of the Transferor have given their consent to the

scheme of amalgamation. The question regarding obtaining consent ofthe creditors under the head "current liabilities" has already been dealt

with earlier in this order. It is only the second objection of the CentralGovernment which needs to be examined.

PURSUANT TO A SCHEME OF AMALGAMATION THEAUTHORISED CAPITAL OF THE TRANSFEROR ANDTRANSFEREE CAN BE CLUBBED:

It is stated in the petition that, upon the scheme of amalgamationbeing sanctioned, the authorized share capital of the transferorcompany would be added to the authorized share capital of thetransferee company and that it must be deemed that all the necessaryrequirements had been complied with by the transferee.

Section 394(4) defines 'property' to include property, rights, powers ofevery description and "liabilities" to include duties of every

description. The authorized capital, a liability of the transferorcompany, also stands transferred to the transferee, on an order,sanctioning the scheme of amalgamation, being passed by the Courtunder Section 391 read with Section 394(1) & (4) (a) of the Companies

Act. Section 94(1)(a) enables a limited company having a share capital,if so authorized by its Articles, to alter the conditions of its


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Memorandum, to increase its share capital by such amount as it thinksexpedient. Under Section 97(1), where a company has increased itsauthorized capital, it shall file with the Registrar a notice of theincrease of the capital within 30 days after passing of the resolution

authorizing the increase and the Registrar shall record the increaseand make any alterations which may be necessary in the Company'sMemorandum or Articles or both. In Telesound India Ltd., In Re.(Delhi)11, the Delhi High Court observed: "...........Amalgamation of acompany with another or an amalgamation of two companies to forma third is brought about by two parallel schemes of arrangementsentered into between one company and its members and the othercompany and its members and the two separate arrangements bind all

the members of the companies and the companies when sanctioned bythe court. Amalgamation is, therefore, an absorption of one companyinto another or merger of both to form a third which is not a mere actof the two companies or their members but is brought about by virtueof a statutory instrument and to that extent has statutory genesis andcharacter, and to that extent it is distinguishable from a mere bilateralarrangement to merge or join in a common endeavour, an undertakingor enterprise. (J.K.(Bombay) P. Ltd v. New Kaiser-I-Hind Spg. & Wvg.Co. Ltd (1970) 40 Comp Cas 689 (SC). Once the court sanctions the

amalgamation, the amalgamation is made effective and binding byvirtue of statutory power, inter alia, by the transferor to the transferee-company of the whole or any part of the undertaking, property rightsand liabilities of the transferor-company by virtue of the provisions ofs.394 of the Act, which are intended to facilitate the process ofamalgamation: Sailendra Kumar Ray v. Bank of Calcutta Ltd. (1948)18 Comp Cas 1 (Cal). The expression "property" and "liabilities", whichcan be transferred on amalgamation, under s.394(1) have been defined

in very wide terms by sub-s.(4)(a) of that section, so as to include"rights and powers of every description" and "duties of everydescription" respectively. The expression "property" would, therefore,

be wide enough to include rights under a contract, including a contractof tenancy. These are co-extensive with the property and right whichthe transferor-company has in relation to its assets, but would not be

wider than what the transferor-company was entitled to enjoy. The
http://www.indiankanoon.org/doc/960821/http://www.indiankanoon.org/doc/960821/http://www.indiankanoon.org/doc/960821/http://www.indiankanoon.org/doc/960821/http://www.indiankanoon.org/doc/960821/http://www.indiankanoon.org/doc/960821/


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rights, property, as indeed the liabilities of the transferor-company,become the rights, property and liabilities of the transferee-companyby virtue of the order of vesting made by the court consequent onamalgamation. It is neither an assignment of right or property, nor an

assignment of property by the company. It is the transfer of rights,property and liabilities along with the company itself and it is only aresult of confusion of thought that it could be described as anassignment by the company to another-person, which is independentand distinct from the company. Such a notion ignores the peculiarposition of amalgamation in company law and its true legal incident. Itis for historical reasons that the device of amalgamation was built intothe company law for facilitating the merger of companies, inter alia,

with a view to help restoration of sick units to health, better, moreeffective and economical management of the corporate sector toensure continued production, increased employment avenues andgeneration of revenues. Section 72-A of the I.T. Act is one of theincentives for this kind of absorption of one company into another. Onamalgamation the transferor-company merges into the transferee-company shedding its corporate shell, but for all purposes remainingalive and thriving as part of the larger whole. In that sense thetransferor -company does not die either on amalgamation or on

dissolution without winding up under sub-s(1) of s.394. It is notwound up because it has merged into another. Winding-up isunnecessary. It is dissolved not because it has died, or ceased to exist,

but because for all practical purposes, it has merged into anotherforming part of one corporate shell. The dissolution is the death of itsindependent corporate shell, because a company cannot have twoshells. It is, therefore, dissolved because the independent shell orcorporate name is superfluous......" (emphasis supplied)

On the scheme of amalgamation being sanctioned by the Court, therights, property and liabilities of the transferor become the rights,property and liability of the transferee company and, as a consequencethereof, the right which the transferor has to issue share capital andthe existing liability in the form of its authorized capital standtransferred to and are vested in the transferee company. Since the


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authorised capital of the transferor, which is transferred to and standsvested in the transferee, has already been subjected to payment of theprescribed fee, absence of a specific provision either in the Companies

Act, 1956, or the Rules made thereunder, requiring the transferor to

again seek approval of the Registrar of Companies or to pay fees onsuch authorized capital, the contention, that approval of the Registrarmust again be sought and fees paid all over again, must necessarily berejected. In M/s. Saparna Infotech Ltd. Vs. M/s. Relinfo Limited20,this Court held: ".......Admittedly, in the present case the transferorcompany has paid the necessary fee to the Registrar and increase ofthe share capital insofar as the transferor company is duly recorded bythe Registrar as required under Section 97 of the Companies Act.

The learned standing counsel for the Central Government argued thatin substance the transfer of the right of the transferor company toissue further share capital would mean that the transferee company

would be entitled to enhance its share capital without following theprocedure prescribed under Section 94 and 97 of the Companies Actand therefore the same should not be permitted.........

.........In the circumstances, if the transferee company has right to issue

further share capital on the date of the amalgamation the same is alegal right in favour of the transferor company and such a right can betransferred in lieu of Sections 394(2) and (4) of the Companies

Act......(emphasis supplied)

A similar view was taken by this Court in M/s Krishnan Products Pvt.Ltd Vs. M/s Krishna Poly Packs Pvt. Ltd21.

In R.K.S. Motors (P) Ltd., In Re22, this Court observed:

"........Having regard to the objections raised by the learned Registrarof Companies, it is appropriate here to consider sections 95 and 97 ofthe Act. A perusal of both the provisions shows that in respect ofconsolidation of share capital or conversion of shares into stock, noticehas got to be issued to the Registrar by the company within 30 daysafter such consolidation or conversion, in which event the Registrar


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shall record such notice and make necessary alterations in thememorandum or articles of association. The default entails penalconsequences under sub-section (3) of the said section. Similarly,notice in the event of increase of share capital of the members shall be

given to the Registrar of Companies within 30 days after passing of theresolution by the Board of directors authorizing the increase and uponreceiving such notice, the Registrar shall include the particulars andclass of shares affected and conditions if any subject to which the newshares are to be issued. The defaulton the part of the company againentails penal consequences under sub-section (3) of section 97. Theobject of sections 95 and 97 seems to be to keep the Registrarinformed about the changes and to incorporate the same in the

memorandum or articles of association or both of the respectivecompanies.

The present scheme of arrangement or amalgamation if it issanctioned by this court, the certified copy of the order of this court isrequired to be filed before the Registrar within 30 days from the dateof the order under sub-section (3) of section 394, for the purpose of itsregistration. The object behind such intimation, which is requiredunder law either under Section 95 or under Section 97 or under

Section 394(3), appears to be one and the same. Again the default innot filing certified copy of the order of this court before the Registrar

within 30 days entails penal consequences. Well, when the certifiedcopy of the order sanctioning the scheme by this court is required to

be filed before the Registrar for the purpose of its registration, there isno reason as to why it shall not be treated as notice to the Registrar asenvisaged under sections 95 and 97 of the Companies Act. Inasmuchas, as discussed hereinabove, the object being the same, the necessarychanges that are required to be made inthe concerned Register by theRegistrar of Companies can be effected after receiving the certifiedcopy of the order of this court sanctioning the scheme. The sanction ofthe scheme by this court has its own effect. It is not a mere act of theparties individually and volitionally. The scheme upon beingsanctioned by this court, it becomes operational by virtue of the orderspassed by this court. In other words, by operation of law, such changes


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would come into effect. Therefore, it has statutory genesis andstatutory character, but not mere individual acts of the companies. Inthat view of the matter, no separate notice informing the Registrarunder section 95 or 97 of the Act need to be given, unlike the other

cases which do not require the sanctions of the court, in myconsidered view, inasmuch as the scheme is required to be sanctioned

by this court and such sanction is required to be registered with theRegistrar of Companies by filing the certified copy of the order of thiscourt. Therefore, I am of the considered view that there has been noinfraction of the provisions of section 95 or section 97, as the case may

be, in any manner. Having regard to the same, the second objectionraised by the learned Registrar of Companies merits no consideration.

As regards first objection as to the cancellation of equity investment,the scheme shall be suitably modified by making it conditional byincorporating this objection." ....(emphasis supplied)

In Re Kemira Laboratories Limited23 a Division Bench of this Courtheld:- "........Now, all the Judges who have decided that no notice isnecessary under Section 97 of the Act, have relied on a judgment of theDelhi High Court reported in Telesound India Ltd., In RE: (1983) 53Company Cases 926. On merger, the two Companies seize to exit i.e.,

to say that neither the transferee Company remains nor the transferorCompany remains, but a third Company comes into existence on the

basis of the scheme sanctioned by the Court. In such a situation, it ishard to accept that there would be an increase in the share capital ofone of the Companies........

.........In view of the Law laid down by this Court and also the judgmentof the Delhi High Court in Telesound India2 to which I am inrespectful agreement, the order passed in C.P. No. 199 of 2003 to the

effect that Clause 10 of the Scheme of Amalgamation would not bepart of the approved scheme, is set aside and O.S.A. No. 24 of 2005 isallowed to that extent......" No good reason has been shown why thetwo merged companies should be required to pay fees again, on thesame authorized capital on which the prescribed fee has already beenpaid by the transferor Company (Jaypee Cement Ltd24). As an order


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can be passed, under Section 391 of the Companies Act itself,regarding increase of authorized share capital by merger of theauthorized capitals of the two companies, (Vasant InvestmentCorporation Limited Vs. Official Liquidator25, Jaypee Cement Ltd24),

the objections of the Central Government, to the scheme ofamalgamation, are overruled.

IS THE SCHEME OF AMALGAMATION IN PUBLIC INTEREST:

The Court cannot abdicate its duty simply because the statutorymajority has approved it and there is no opposition to the scheme ofamalgamation in Court. It must scrutinize the scheme to find out

whether it is an arrangement which can, by reasonable people

conversant with the subject, be regarded as beneficial to those who arelikely to be affected by it. In pursuit of such an enquiry the court is nottied down by any rigid principles or strait-jacket formulae. Noenumeration contained in judicial decisions of the factors which can

be taken into account, howsoever precise, can be treated as exhaustiveso as to limit the scope of the inquiry which, having regard to varyingcircumstances, might differ from case to case. The burden lies on thepetitioner-company to show that the scheme of amalgamation is fair,

reasonable, workable and is such that a man of business wouldreasonably approve. The Court would, of course, take into account thefact that it has been approved by a big majority vote, but it would notshirk its duty to scrutinize the scheme. (Bank of Baroda Ltd. Vs.Mahindra Ugine Steel Co. Ltd.26).

Sections 391 to 396 constitute a complete code and the provisions arein a way derogatory to the law of contract. When it exercises thepower, conferred on it by section 391(2) to sanction the scheme of

compromise or arrangement, the Court by its act is imposing thescheme on dissenting members of that class. Before taking such anaction, it would be open to the court to examine the scheme beforeimposing it on the unwilling/dissenting members of the class. Even ifall the statutory formalities are duly carried out, the Court has still the


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discretion either to sanction or refuse to sanction the scheme. (Bank ofBaroda Ltd.26 and Bengal Hotels P. Ltd. In re27).

The amalgamation must fulfil some felt need, some purpose, some

object and that must have some co-relation with public interest. TheCourt is charged with a duty to ascertain whether the affairs, of boththe transferor and the transferee, have been carried on not only in amanner not prejudicial to its members but also that it is not againstpublic interest. The expression "public interest" must take its colourand content from the context in which it is used. (Union of India Vs.

Ambalal Sarabhai Enterprises Ltd28). The Indian law, a departurefrom the English law, enjoins a duty on the Court to examineobjectively whether the merger is, or is not, violative of public interest.

What would be in public interest cannot be put in a strait-jacket. It is adynamic concept which keeps on changing. It has been explained inBlack's Law Dictionary as:-

"Something in which the public, the community at large, has somepecuniary interest, or some interest by which their legal rights orliabilities are affected. It does not mean anything so narrow as merecuriosity, or as the interests of the particular locality which may be

affected by the matters in question. Interest shared by citizensgenerally in affairs of local, State or national Government."

It is an expression of wide amplitude. A scheme valid and good mayyet be bad if it is against public interest. The basic principle of thesatisfaction, that the scheme is not contrary to public interest, is noneother than the broad and general principles inherent in anycompromise or settlement entered into between the parties that itshould not be unfair or contrary to public policy or unconscionable. In

amalgamation of companies, the courts have evolved, the principle of"prudent business management test" or that the scheme should not bea device to evade the law. (Hindustan Lever Employees' Union Vs.Hindustan Lever Ltd.,29). No court of law would ever countenanceany scheme of compromise or arrangement if it finds that it is anillegal scheme or is otherwise unfair or unjust to the class of


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shareholders or creditors for whom it is meant. The fairness of thescheme, qua the disputing minority shareholders or creditors, also hasto be kept in view by the Company Court while putting its seal ofapproval on the scheme.

The Company Court should examine whether the proposed scheme ofcompromise and arrangement is violative of any provision of law andis not contrary to public policy. For ascertaining the real purposeunderlying the scheme with a view to be satisfied on this aspect, theCourt, if necessary, can pierce the veil of apparent corporate purposeunderlying the scheme and can judiciously x-ray the same. TheCompany Court has also to satisfy itself that the members or class ofmembers or the creditors or class of creditors, as the case may be,

were acting bonafide and in good faith and were not coercing theminority in order to promote any interest adverse to them. It mustalso ensure that the scheme as a whole is also just, fair and reasonablefrom the point of view of prudent men of business taking a commercialdecision beneficial to the class represented by them for whom thescheme is meant. (Miheer H. Mafatlal1). Unless the scheme is shownto be contrary to any law or is such as to shock the conscience of thecourt or is patently unfair to the members or creditors or any class of

them, or is against public interest or against public policy, the courtshould not come in the way of business by rejecting a bonafide schemeunder Section 391. (Zee Interactive Multimedia Ltd., In re4).

The petitioner-transferor company is presently engaged in thebusiness of global customer management and billing (CM&B)solutions provider to Pay TV, Broadband, Triple-play and IPTVservices and in providing integrated billing and customer caresolutions and services to video, data and content service providers.

The transferor is a wholly owned subsidiary of the transferee companywhich is also engaged in similar activities. The underlying objects ofthe scheme is to synergise operations of both the companies and poolits resources to give more thrust and integrate their business facilitiesand infrastructure under one single unit, which would give them thefinancial edge necessary to withstand competition and contribute to


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the business and profitability of the amalgamated company. Thiswould be beneficial and advantageous in the long-term interests ofboth the companies and its shareholders. The scheme also providesthat the employees of the transferor would become the employees of

the transferee without interruption in service and on terms andconditions not less favourable than those subsisting with reference tothe transferor company. The scheme of amalgamation, by way oftransfer of the whole of the undertaking of the transferor, does notaffect the rights and interests of the members of the transfereecompany as their shareholding and other rights, as members of thetransferee company, remain unaffected as no new shares are beingissued and there is no change in the capital structure. The scheme of

amalgamation does not also affect the creditors of the transferee as thenet worth of the transferor is positive and its assets exceed itsliabilities. The transferor is a wholly owned subsidiary of thetransferee. The scheme of amalgamation involves the entireundertaking of the transferor to be transferred to and vested in thetransferee with a view to achieve the aforementioned objects. It cannot

be said that, in the present case, the scheme of amalgamation is adevice to evade the law, is unconscionable, unfair or unjust to themembers/creditors of both the transferor and transferee companies or

that it is against public policy or that it shocks the conscience of theCourt. It cannot, therefore, be said that the scheme of amalgamation,if approved, would be prejudicial to public interest.

I consider it appropriate, therefore, to sanction the scheme ofamalgamation. As required under Section 394(3) of the Companies

Act, read with Rule 81 of the Companies (Court) Rules, 1959, thepetitioner shall file a certified copy, of the order of this Court, with theRegistrar of Companies for its registration within thirty days from thedate of the order.

?1 1997(1) SCC 579

2 2003(5) ALD 327


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3 (2003) 3 ALD 654

4 (2002) 3 Comp Cas 733 (Bomb)

5 (2003)4 Com. L.J. 102(Bom)

6 (1974) Vol.44 Com. Cases 359 (Delhi)

7 (1978) 48 Comp Cas 184 (Delhi)

8 (A.P.) Vol. 89 (1997) CC 285

9 (1995) 84 Comp Cas 231 (Guj)

10 (1980)50 Comp Cas 623 (Madras)

11 (1983) 53 Comp Cas 927 (Delhi)

12 Vol. 89 1997 CC 285 (AP)

13 (2002) 104 BomLR 399

14 AIR 1965 SC 40

15 (1976)3 All ER 462

16 (1995) 1 All ER 725

17 (1996) 4 SCC 622

18 (1995)1 SCC 478

19 (1988)4 SCC 59

20 Judgment in C.P. No. 149 and 150 of 2001 dated 04.01.2002 21Judgment in C.P.Nos.68 and 69 of 2005 dated 13.8.2007

22 (2004)60 CLA 309 (AP)


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23 Judgment in O.S.A. Nos. 24, 44 and 46 of 2005 and C.P. Nos. 144,145 and 146 of 2003 dated 25.01.2007

24 2004 CLC 1031 (Allahabad High Court)

25 (1981)51Com Cas 20 (Bombay HC)

26 (1976) 46 Com Cas 227

27 (1977) 47 comp Cas 597 (Guj)

28 (1984)55 Com.Cas.623

29 (1995) 83 Comp Cas 30 (SC)

*THE HON'BLE MR. JUSTICE D.S.R.VARMA AND THE HON'BLEMR. JUSTICE D.APPA RAO

+Criminal Appeal No. 748 OF 2005

%07-08-2007

#Godugula Adellu s/o Malkanna.

The State of Andhra Pradesh,

Rep. By Public Prosecutor,

High Court of A.P., Hyderabad.

Counsel for the Appellant: SRI Vinod Kumar Deshpande.

Counsel for the Respondent: Public Prosecutor.

:ORAL JUDGMENT: (per the HON'BLE MR. JUSTICE D.S.R.VARMA)

Heard the earned counsel appearing for the appellant as well as thelearned Public Prosecutor, appearing for the State.


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2. Appellant is the accused No.1 in the Sessions Case.

3. This Criminal Appeal, by the accused No.1, under Section 374 (2) ofthe Code of Criminal Procedure, is directed against the judgment,

dated 21.03.2005, in Sessions Case No.447 of 2003, passed by the IIAdditional Sessions Judge (Fast Track Court), Adilabad, convicting theappellant for the offence punishable under Section 302 of the IndianPenal Code (for brevity "IPC") and sentencing him to sufferimprisonment for life and to pay a fine of Rs.5,000/-, in default tosuffer simple imprisonment for three months and also convicting forthe offence punishable under Section 498-A IPC and sentencing himto suffer rigorous imprisonment for one year and to pay a fine ofRs.1,000/-, in default to suffer simple imprisonment for two months,

directing to run both the sentences concurrently.

4. The gravamen of the charge is that the deceased, the wife of theaccused No.1, was subjected to cruelty and harassment and waseventually murdered by the accused No.1, on 09.06.2002 at about 8pm., by pouring kerosene on her and setting fire, at the abatement ofthe accused No.2, father of the accused No.1. Ex.P-1 is the complaintgiven P.W.1 to the police on 10.6.2002 at 6.00 a.m.

5. The facts of the case, in brief, are that the deceased was working asAnganwadi Teacher and the accused was working as a driver; thattheir marriage took place about eight years ago and they were residingin the house of P.W.1, who is no other than the mother of thedeceased, and were blessed with two daughters; that on the fateful dayi.e., 09.06.2002, in the morning, P.W.1, the deceased and herdaughter, P.W.8, along with relatives, participated in a festival in the

village; that they cooked food at the place of festival and returned back

to home and that at about 8.00 p.m., the accused came in aninebriated condition and asked the deceased to serve food withmutton; that since no mutton was served, at bedtime, he went to theroom where the deceased was sleeping, allegedly poured kerosene onthe deceased and set her ablaze; that the deceased came out of theroom in flames and fell down. After the flames were extinguished, she


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was shifted to Government Hospital, Adilabad, where she succumbedto the burn injuries.

6. Basing on the complaint given by P.W.1, initially a case in Crime

No.90 of 2002 was registered against the accused Nos.1 and 2 for theoffences punishable under Sections 498-A and 307 IPC. P.W.21,Judicial Magistrate of First Class, Adilabad, had recorded the dyingdeclaration of the deceased. After the death of the deceased, during thecourse of treatment, the section of law was altered to Section 302 and498-A IPC. After completion of investigation, the police laid thecharge sheet against the accused Nos.1 and 2.

7. In order to bring home the guilt of the accused Nos.1 and 2, the

prosecution examined P.Ws.1 to 24 and got marked Exs.P-1 to P-23and M.Os.1 and 2 on its behalf and on behalf of the accused Nos.1 and2, no oral evidence was let in, however, portions of 161 statements ofP.Ws.3 and 4 were marked as Exs.D-1 and D-2.

8. The Court blow, having considered the entire evidence, both oraland documentary, available on record, particularly the evidence ofPWs.2 to 9, said to be the eyewitnesses, and the dying declaration,under Ex.P-16, recorded by P.W.21, Judicial Magistrate of First Class,

Adilabad, found the accused No.1 guilty for the offences punishableunder Sections 302 and 498-A IPC and sentenced him, as statedabove. However, the Court below found the accused No.2 not guiltyand accordingly acquitted him for the offence punishable underSection 498-A IPC, with which he was charged.

9. Aggrieved by the conviction and sentence, imposed against him, theaccused No.1 has preferred this Criminal Appeal.

10. PWs.2 to 9 were said to be the eyewitnesses. PWs.10 to 13 are saidto be village elders, who spoke about the existence of disputes betweenthe deceased and the accused. However, as regards the said fact, it isonly P.W.12, who spoke about the said aspect, but P.Ws.10, 11 and 13turned hostile. P.W.21 is the Judicial Magistrate of First Class,

Adilabad, who recorded the dying declaration of the deceased, under


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Ex.P-16. P.Ws.16 and 17 are panch witnesses for confession andrecovery. PWs.18 to 20 and 24 are the Investigating Officers.

11. Among the above, the evidence of alleged eyewitnesses i.e., PWs.2

to 9, is more relevant.

12. P.W.1, mother of the deceased, deposed that the accused No.1 cameto the house in the evening in a drunken state, on the festival day, and

beat the deceased on the ground that she did not preserve mutton forhim and, later, when the accused poured kerosene on her body and setfire, the deceased raised cries, came out of the house in flames and felldown in front of the house and that the accused No.1 ran away fromthe house through back door. Later, with the assistance of other

witnesses, the deceased was shifted to the Government Hospital,Adilabad. P.W.1 further deposed that the accused No.1 used todemand money and used to harass the deceased in that regard; that onmany occasions, panchayats were also held in the presence of elders ofthe village and the accused was advised not to harass the deceased.

13. In the cross examination, P.W.1 stated that there are three roomsin their house besides kitchen; that the incident had occurred in thethird room of her house; that the doors were open from where shecould see the accused No.1 beating the deceased and that she did notcall any neighbour for help. Except that, nothing was elicited fromP.W.1 in order to demolish her evidence.

14. The evidence of P.W.2, who is nephew of P.W.1, is that somequarrel had taken place between the deceased and the accused No.1 onthe festival day and, after some time, he saw the deceased coming outof the house in flames and that they shifted the deceased to

Government Hospital, Adilabad, for treatment. Same is the effect ofevidence of PWs.3, 5, 8, 9 and 22, grandmother of the deceased.

15. P.W.4, who is an auto driver, deposed that he took the deceased tothe Government Hospital, Adilabad, after the flames on the body ofthe deceased were extinguished.


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16. Another important witness is P.W.8, who is no other than daughterof the accused. She was a child witness and the Court below, havingsatisfied with her mental capability to adduce the evidence, posedquestions to which she answered that the accused No.1 beat her

deceased mother and quarreled with her by bolting the door frominside; that after sometime, her mother came out in flames and thather father killed her mother. Again nothing useful came out from theevidence of P.W.8 during her cross-examination, in favour of theaccused No.1.

17. Therefore, from the evidence of PWs.1, 2, 3, 5, 8, 9, 21 and 22, it isevident that two aspects were categorically spoken. Firstly, on thefestival day, the accused No.1 came back to home in the evening, at

about 8.00 p.m., asked the deceased to serve food with mutton andfailure to comply with such demand, resulted in quarrel between the

wife and the husband, in another room of the same house, belongingto P.W.1, who is no other than mother of the deceased, and secondly,the deceased came out of the room in flames, which were extinguished

by the other witnesses, and was shifted to Government Hospital,Adilabad, where, during the course of treatment, she died.

18. In the instant case, the aspect, which requires consideration is,nobody saw the accused No.1 really pouring the kerosene against thedeceased and lit her with matchstick. However, the fact remains thatall the abovementioned witnesses saw the deceased coming out inflames and there is any amount of consistency in this regard.Therefore, we are of the view that the accused No.1 and the deceasedalone were in the room where there was a quarrel between them,resulting in everybody seeing the deceased in flames.

19. Now, the question is, at whose instance the deceased was found inflames? In other words, whether the death of the deceased washomicidal or suicidal?

20. From the evidence of abovementioned witnesses, the only thingappears to the Court is that the deceased was set ablaze. The fact to be


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essentially established by the prosecution is that the accused No.1 wasthe only responsible person for the said incident.

21. To this extent, the evidence on record against the accused No.1, for

the offence punishable under Section 302 IPC, is purelycircumstantial. Unless the circumstances are so strong and suggestiveof the fact that the death was homicidal, it is not sufficient for thisCourt to jump at the conclusion that it was the accused No.1 alone,

who was responsible for the death of the deceased.

22. Therefore, some additional material has to be searched for and, inthat pursuit, we found the evidence in the shape of Ex. P-16, dyingdeclaration, wherein it has been stated by the deceased, in the

hospital, while undergoing treatment, that she filed criminal casesagainst her husband. It is further stated by her that, on the fateful day,the accused No.1 picked up a quarrel with her for some curry, as it wasa festival day. According to her, the accused No.1 asked her to pourkerosene on her body and saying so, he handed over a matchbox to litherself, and accordingly, she poured kerosene on herself and setablaze. She further stated that, at the incitement of her husband, sheset herself ablaze. It is her further evidence that her husband incited

her to set herself on fire at the instigation of his father, the accusedNo.2. In view of this allegation against the father of the accused No.1i.e., the accused No.2, Section 498-A IPC was added against him along

with the accused No.1. However, as stated earlier, since the accusedNo.2 was acquitted of the offence, with which he was charged, we arenot going into the details of his involvement, in the incident, in thisCriminal Appeal.

23. Even from the dying declaration, Ex.P-16, it can be pursued that

the deceased poured kerosene on herself and set fire only at theinstance of the accused No.1. The dying declaration of the deceased, inour view, is a crucial piece of evidence, on record. There is absolutelyno doubt whatsoever that can be expressed from any angle nor doubtthe veracity of her statement.


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24. A combined reading of the evidence of PWs.1, 2, 3, 5, 8, 9, 21 and22, in our considered view, matches with the contents in the dyingdeclaration.

25. All the eyewitnesses are only partial eyewitnesses. They did notactually see the accused No.1 setting his wife ablaze. But, the factremains that every witness, including P.W.8, who is no other than thedaughter of the accused No.1, stated that the deceased came out inflames. When these circumstances are read together with the dyingdeclaration, it is obvious that the involvement of the accused No.1 isnot proved to the extent of committing offence under Section 302 IPC,

but certainly prove to the extent of abetting the deceased to commitsuicide creating emotional atmosphere with sufficient background for

the dispute and the resultant provocation for the deceased to commitsuicide.

26. In other words, we are of the view that the aspect of homicide,allegedly committed by the accused No.1, could not be established bythe prosecution beyond all reasonable doubt, but the offencepunishable under Section 306 IPC, by beating and instigating thedeceased to commit suicide by pouring kerosene and setting herself

ablaze, had been sufficiently and succinctly established. Therefore, wefeel it appropriate to differ with the finding recorded by the Courtbelow, insofar as the commission of offence by the accused No.1,punishable under Section 302 IPC.

27. As regards the offence said to have been committed by the accusedNo.1 under Section 498-A IPC, it is again on record that the evidenceof P.Ws.1, 5 and 8, including the dying declaration, under Ex.P-16, iscategorical to the effect that there was some dispute between the

deceased and the accused No.1 and the deceased was ill-treated by theaccused No.1 for dowry.

28. Further, the evidence of P.W.12, who is a village elder and was aparty to the panchayath to resolve the dispute between the deceasedand the accused No.1, shows that there was some complaint made by


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the deceased about the ill-treatment meted out to her at the hands ofthe accused No.1. There is not much rebuttal evidence to disprove thischarge, levelled against the accused No.1. Therefore, we are of theconsidered view that this charge against the accused No.1 was also

proved, punishable under Section 498-A IPC, and we agree with thefinding, recorded by the Court below, insofar as conviction andsentence as well, in this regard.

29. The next crucial question, which is rather incidental and forced usto drive at, is, as to whether the accused No.1 can be found guilty forthe offence punishable under Section 306 IPC instead of the offencesaid to have been committed under Section 302 IPC?

30. The earlier law, on this subject, was mostly based on the decisioninSANGARABOINA SREENU vs. STATE OF ANDHRA PRADESH,1

wherein the apex Court held thus:

"...This appeal must succeed for the simple reason that havingacquitted the appellant of the charge under Section 302 IPC - which

was the only charge framed against him - the High Court could nothave convicted him of the offence under Sec. 306 IPC. It is true thatSection 222 Cr. P.C. entitles a court to convict a person of an offence

which is minor in comparison to the one for which he is tried underSection 306 IPC cannot be said to be a minor offence in relation to anoffence under Section 302 IPC within the meaning of Section 222 Cr.P.C. for the two offences are of distinct and different categories. Whilethe basic constituent of an offence under Sec. 302 IPC is homicidaldeath, those of Section 306 IPC are suicidal death and abetmentthereof..."

31. So, the view of the apex Court for a long time was to the effect thatSections 306 and 302 IPC are two distinct and different category ofoffences, inasmuch as, Section 302 IPC is absolutely homicidal death,

whereas Section 306 IPC is suicidal death owing to the abetment.Here, again we have to see that there is basic difference between the
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offences under Sections 306 and 309 IPC. The gravity of offence underSection 306 IPC is more serious than the one under Section 309 IPC.

32. The basic difference between these two Sections is, to constitute an

offence under Section 309 IPC, it shall be an attempt to commitsuicide on one's own volition, whereas under Section 306 IPC, onecommits suicide at the instigation or provocation of the other, as thecase be, coupled with some force from different source. However, thedistinction between the offences under Sections 306 and 309 IPC isnot very relevant to deal with the present subject.

33. But, there is a sea change and deviation in law laid down by theapex Court in SANGARABOINA SREENU's case (1 supra) in the latter

judgments of the apex Court.

34. While assisting this Court, Sri C.Padmanabha Reddy, the learnedSenior Counsel, brought to the notice of this Court that the apex Courthad taken a different view in subsequent judgments and the ratio laiddown in SANGARABOINA SREENU's case (1 supra) was held to be nomore a good law. In DALBIR SINGH vs. STATE OF UTTARPRADESH,2 the apex Court, while elaborately dealing with Sections302, 304-B and 498-A IPC, held thus:

"...In view of Sec. 464 Cr. P.C. it is possible for the appellate orrevisional court to convict an accused for an offence for which nocharge was framed unless the court is of the opinion that a failure of

justice would in fact occasion. In order to judge whether a failure ofjustice has been occasioned, it will be relevant to examine whether theaccused was aware of the basis ingredients of the offence for which heis being convicted and whether the main facts sought to be established

against him were explained to him clearly and whether he got a fairchance to defend himself..."

35. It is to be noted that the offences punishable under Sections 304-Band 302 read with Section 498-A IPC are distinct. Nevertheless, theoffence under Section 304-B IPC is slightly inferior to Section 302IPC. Even though there was no charge framed under Section 304-B


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IPC and the charge was under Sections 302 and 498-A IPC only, in theevent of the Court coming to the conclusion that the offence allegedlycommitted by the accused does not amount to the offence punishableunder Section 302 IPC, but amounts to an offence punishable under

Section 304-B IPC, it is imperative for the trial court to put theaccused while examining him under Section 313 Cr.P.C., which is in a

way giving the accused an opportunity of audi alterim partem toexplain whether he was liable for the said offence.

36. In the present case also, the offences charged against the accusedNo.1 are both under Sections 302 and 498-A IPC. As alreadyexpressed by us, the prosecution had failed to establish the guilt of theaccused No.1 for the offence punishable under Section 302 IPC, but,

beyond any doubt, there was evidence by way of abetting the deceasedto resort to the commission of suicide by pouring kerosene on herselfand setting ablaze. The circumstances stated by all the witnesses aretotally coherent with each other and support the main and importantcorroborative piece of evidence in Ex.P-16, dying declaration.

37. Therefore, in a situation, where both the charges under Sections302 IPC and 306 IPC cannot be levelled against the accused, but, if the

circumstances suggest conclusively that the offence was sufficientlyproved to the extent of the offence under Section 306 IPC, this Court,being an appellate Court, can always hold that the accused hascommitted an offence under Section 306 IPC and the conviction forthe said offence can safely be recorded. We are of the further view thatthe same would not result in the failure of justice.

38. Yet in another judgment, rendered by the apex Court, inSHAMNSAHEB M. MULTTANI vs. STATE OF KARNATAKA3, though

the accused was acquitted for the offences under Sections 302 and498-A IPC, as was originally charged, he was convicted for thealternative charge for the offence under Section 304-B IPC.

39. In such circumstances, it was pointed out by the apex Court, invarious terms, that in case of the offence under Section 304-B IPC, it is


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imperative for the Court to invoke the presumptive jurisdiction, asenvisaged under Section 113-B of the Indian Evidence Act. The apexCourt, at paragraph Nos.15 and 16 of the said judgment (3 supra), heldthus:

"15. ...Section 222(1) of the Code deals with a case "when a person ischarged with an offence consisting of several particulars." The Sectionpermits the Court to convict the accused "of the minor offence, thoughhe was not charged with it." Sub-section (2) deals with a similar, butslightly different situation. "When a person is charged with an offenceand facts are proved which reduce it to a minor offence, he may beconvicted of the minor offence although he is not charged with it."

16. What is meant by "a minor offence" for the purpose of Section 222of the Code? Although the said expression is not defined in the Code itcan be discerned from the context that the test of minor offence is notmerely that the prescribed punishment is less than the major offence.The two illustrations provided in the section would bring the abovepoint home well. Only if the two offences are cognate offences,

wherein the main ingredients are common, the one punishable amongthem with a lesser sentence can be regarded as minor offence vis--vis

the other offence.

40. Similarly, in the present case also, the accused No.1 was chargedonly for the offences punishable under Sections 302 and 498-A IPC.But, as already observed, there is a failure on the part of theprosecution, in establishing its case against the accused No.1 for theoffence punishable under Section 302 IPC, as pointed out inSHAMNSAHEB M. MULTTANI's case (3 supra). Though the offenceunder Section 304-B IPC, cannot, in fact, be treated as a minor

offence, as contemplated under Section 222 of Cr.P.C., the offencesunder Sections 302 and 306 IPC should be treated as cognate offences,as the ingredients of both the offences are substantially common.

41. From a conjoint reading of the abovementioned two judgments (2and 3 supra), it is obvious that even though there is no specific charge


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framed and the offence under other section is made out, the Court canrecord a finding under such a charge, which is punishable with lessersentence for a cognate offence.

42. For the foregoing discussion, particularly having regard to the viewexpressed by us that the offence under Sections 306 and 498-A IPC,have been established by the prosecution, we feel it appropriate tomodify the conviction and sentence, imposed by the Court below,against the accused No.1, as under: "The appellant -- accused No.1 isfound guilty for the offence punishable under Section 306 IPC and,accordingly, he is convicted and sentenced to suffer rigorousimprisonment for six years and to pay a fine of Rs.5,000/-, in defaultto suffer rigorous imprisonment for five months. However, the

conviction and sentence, imposed by the Court below, on the appellant-- accused No.1, for the offence punishable under Section 498-A IPC,are confirmed. Both the sentences, for the offences under Sections 306and 498-A IPC, shall run concurrently. The appellant - accused No.1 isentitled to the benefit of set off, as contemplated under Section 428Cr.P.C.

43. Accordingly, the Criminal Appeal is allowed in part, with the above

modifications in the conviction and sentences.

?1 (1997) 5 SCC 348

2 (2004) 5 S.C.C. 334

3 AIR 2001 S.C. 921

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Magnaquest Solutions - AP HC - 2007.docx