The Supreme Court's interpretation gives more powers to the company court to convene a meeting.
The powers of the company court to convene a meeting of the creditors and shareholders are considerable, and when they deal with amalgamation and merger schemes, they are critical to the survival of a corporation. Therefore, there is considerable case law on the powers under Section 391 and related provisions of the Companies Act. However, the company court’s power to call a meeting at the threshold itself, without hearing the creditors and members, is a question which does not arise often. The recent Supreme Court judgement in Chembra Orchard Produce Ltd vs Regional Director dealt with this issue directly for the first time.
According to Section 391(1), when a compromise or arrangement is proposed between a company and its creditors or members, the company court can call a meeting and give directions for its conduct. But according to Rule 67 of the Companies (Court) Rules, when a judge’s summon for directions to convene a meeting is sought by a company, the other parties need not be heard. It could be moved ‘ex parte’. This was the point of discord in the present case. The company moved an application before the company judge to hold a meeting of the shareholders and members to consider a scheme of amalgamation. It was ex parte application.
When the application was being considered, a query was raised as to whether it was not necessary to hear the shareholders and creditors before issuing directions for holding the meeting. The company maintained that it was not required under Rule 67. When the question was referred to the Karnataka High Court, it stated that all parties should be heard before calling a meeting. Therefore, the company appealed to the Supreme Court and it accepted the company’s view.
Since this is the first time the apex court is dealing with such a question, the judgement set forth the reasons why it thought such a hearing was not necessary. If such a hearing is required to be given to contributors, creditors and shareholders, the entire scheme of Section 391 would become unworkable. It pointed out that since Rule 67 categorically states that summons for directions shall be moved ex parte, the question of prejudice or rule of natural justice did not come into play. Moreover, the meeting is a preliminary step at the threshold stage and it is traditionally not insisted upon to give notice to all interested parties. At a later stage, they do get notice of the meeting.
Adopting this method does not mean that the company court need not apply its mind. It must be satisfied about the genuineness or the bona fides of the scheme. There is a checklist in Rule 69 of all the important issues that the court should consider before taking the preliminary step of calling the meeting. Twelve years ago, the Supreme Court has emphasised this point in the leading case, Miheer Mafatlal vs Mafatlal Industries Ltd. It said: “A company court cannot act merely as a rubber stamp and almost automatically put its seal of approval on a scheme. The fairness of the scheme with regard to the dissenting minority shareholders or creditors should be kept in view.”
Two high courts have dealt with the issue of calling meeting at the preliminary stage. The Bombay High Court, in the case of Sakamari Steel & Alloys Ltd (1979), stated that it was not compulsory for the company court to give directions to convene a meeting as requested. It has to apply its own mind and be satisfied with the merits of the application. “If the court has jurisdiction to refuse to sanction a scheme, it would have also jurisdiction to refuse to give a direction to convene a meeting,” that judgement said.
Several factors could be weighed at the preliminary state itself. The high court pointed out some of them, like whether the company is qualified to sponsor a scheme, its motive and whether the company intends to save itself from liquidation or it wants to eat up a part or whole of the principal amount or interest of a particular class of creditors. The court can supervise the proposed scheme and examine its essential nature. It, in any case, it cannot be casual or mechanical in its role.
The Supreme Court did not agree with the interpretation given by the Allahabad High Court regarding convening of meeting under Rules 67 and 69. Nor did it approve of the Karnataka High Court judgement in the present case. The reason given is that the rules should be made workable.
