COMPANY

MPANY LAW-II CASE ANALYSIS ON

SESA INDUS
STRIES LTD. V KRISHNA H. BAJA
AJ
(2011) 3 SCC 218

PROJECT SUBMITTED BY:-

ANKIT NANDE

1783015

B.A.LL.B.(A)

PROJECT GUIDED BY:-

BY:

CS(MS.) PRATITI NAYAK

ASSISTANT PROFESSOR

1|Page
 ACKNOWLEDGEMENT
I, ANKIT NANDE, feel myself highly elated, as it gives me tremendous pleasure to come
out with work on the case “SESA INDUSTRIES LTD. V KRISHNA H. BAJAJ, (2011) 3 SCC 218”.

First and foremost, I take this opportunity to thank CS(Ms.) Pratiti Nayak Faculty,
Company Law, KIIT School of Law, Bhubaneswar for allotting me such topic to work on which
also helped me in doing a lot of Research and I came to know about so many new things I am
really thankful to them.

Secondly I would also like to thank my parents and friends who helped me a lot in finalizing this
project within the limited time frame.

ANKIT NANDE,

BATCH -2017-22,

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

2|Page
 ABSTRACT
In cases that contribute to a spanning history with regard to the inspection of the books of
account, Sesa Industries Ltd. v. Krishna H. Bajaj 1 hold pivotal precedential value. In this perusal
of the aforementioned case, the analysis focuses on the issue of the disclosing of existence of
proceeding under sec. 209A in terms of of the proviso to sec. 391(2) of the Companies Act,1956.
This is done on the basis of analyzing the various provisions of law that have been enumerated in
the case, and also ones that have been implied in the same. The main aim of this perusal is to
decide upon whether the decision of the apex court is de jure, which is found to be righteous.

1
(2011) 3 SCC 218.

3|Page
 FACTS AND PROCEDURAL HISTORY

The facts in brief were that on 26th July, 2005, the Board of SIL passed a resolution seeking to
amalgamate SIL with SGL. Subsequently, SIL and SGL filed company applications in the
Bombay High Court seeking permission for convening a general body meeting for the purpose.
Krishna Bajaj, holder of 0.29% of the shares in SIL, intervened in these petitions objecting to the
amalgamation. He relied on an inspection report under Section 209A of the Companies Act,
1956, where some alleged malpractices, including siphoning of funds, were highlighted. The
Single Judge rejected the objections, and allowed SIL and SGL to convene a general body
meeting. The Judge also directed a disclosure to be made to the meeting in respect of the
Inspection Report.

Following this, a general body meeting was held, and 99% of the shareholders consented to the
scheme. SIL and SGL approached the High Court for sanctioning of the scheme. The Registrar
of Companies, Goa, filed an affidavit stating that he had no objections, subject to the fact that the
scheme should not result in any dilution of legal action on the basis of the Inspection Report. The
Official Liquidator (“OL”) also filed a Report 2 that the affairs of the company were not being
carried out prejudicial to the interest of the members/public. This report was attacked by the
objector to the scheme as being vitiated because of non-application of mind.

By a judgment dated 18th December, 2008, the Company Judge sanctioned the scheme of
amalgamation between SGL and SIL. In his decision, he gave detailed reasons after appreciation
of the facts as to why the objections were being rejected. This decision was reversed by a
Division Bench, inter alia on the grounds that a scheme should not be sanctioned when there was
a pending investigation u/s 209A. Further, the Court stated that there was no affidavit by the
Registrar that the affairs of the company were not being carried out in a manner prejudicial to the
interests of the members/public; and consequently, the first Proviso to Section 394(1) was not
complied with. It held that the OL’s report was vitiated, and consequently the second Proviso
was not complied with either.

2
(as required under the second Proviso to Section 394(1).

4|Page
 ISSUES RAISED

 Whether the appellant and SGL had disclosed sufficient information to the shareholders
so as to enable them to arrive at an informed decision?

 Whether the Division Bench was correct in holding that the affidavit filed by the Official
Liquidator was vitiated on account of non-disclosure of all material facts.

ARGUMENTS ON BEHALF OF THE APPELLANT

 Once a scheme of amalgamation has been approved by a majority of the shareholders

after sufficient disclosure in the explanatory statement regarding the pendency of an
inspection under Section 209A of the Act, it is neither expedient nor desirable for Courts
to sit in judgment over a commercial decision of the shareholders.

 It is settled that pendency of an inspection under Section 209A or under Section 235 of
the Act should not stall a scheme of amalgamation.3

 Division Bench erred in rejecting the scheme of amalgamation on the sole ground that the
requirement of the first proviso to Section 394(1) of the Act has not been complied with,
as it is settled that the said proviso only applies to the amalgamation of a company which
is being wound up.

 In the instant case, the prayer in the amalgamation petition was for "dissolution without
winding up" and hence only the second proviso to Section 394(1) was applicable.

3
In Re, Reliance Petroleum Ltd. [2003] 46 SCL 38 (Guj).

5|Page
  The use of the word "further" in the second proviso to Section 394(1) of the Act does not
indicate that the said proviso is an additional provision in relation to the situation
contemplated under the first proviso.4

 Drawing an analogy with cases under the Election laws, learned counsel pleaded that unless
a person is convicted, no adverse inference can be drawn against him.5

 The pendency of the investigation cannot come in the way of amalgamation in as much
as even if the allegations are found to be true, the same will lead only to a report
under Section 241 of the Act and ultimately a prosecution under Section 242 of the Act
against the Directors/Principal officers of the company, which would not dilute or affect
the scheme of amalgamation.6

 The functioning of a company was akin to that of a parliamentary democracy wherein

the overall control is exercised by the majority of the shareholders. 7 In the instant case,
majority of the shareholders had approved the scheme of amalgamation despite having
full knowledge of the proceedings against the Companies and the prima facie findings.

ARGUMENTS ON BEHALF OF THE RESPONDENT

 Provisions of Chapter V of Part VI of the Act were intended to introduce a system of

checks and balances to promote the interests of shareholders, creditors and society at
large so as to promote a healthy corporate governance culture, and the Courts should
adopt an interpretation that advances this object.

 The provisions of Section 393(1)(a) of the Act had not been complied with in as much as
all material facts were not placed before the shareholders, in particular the preliminary

4
Regional Director, Company Law Board, Government of India Vs. Mysore Galvanising Co. Pvt. Ltd. &
Ors. [1976] 46 Comp Cas 639 (Kar)
5
Ranjitsing Brahmajeetsing Sharma Vs. State of Maharashtra & Anr. (2005) 5 SCC 294.
6
In re Search Chem Industries Ltd. [2006] 129 Comp Cas 471 (Guj).
7
Life Insurance Corporation of India Vs. Escorts Ltd. & Ors (1986) 1 SCC 264.

6|Page
 letters of findings addressed to the Managing Director of SIL by the Inspector pursuant to
the inspection under Section 209A of the Act on 28th September, 2005.

 A mere enclosure of an extract of covering letter dated 17th February, 2006 cannot be
construed as sufficient compliance with the mandate of Section 393(1)(a), as the said
letter did not disclose the details of the findings to the effect that the affairs of the
company had been conducted in a manner which was prejudicial to the interests of its
members.8
 The petitioner has failed to disclose even before this Court, that the Serious Fraud
Investigation Office (SFIO) was conducting an investigation into the affairs of the
company under the provisions of Section 235 of the Act, and even though the said
investigation proceedings arose later, the obligation under the proviso of Section
391(2) is a continuing obligation and, therefore, the appellant was obliged to disclose the
same before this Court as well.

 The Division Bench had rightly concluded that the mandate of Section 394 had not been
complied with thereby raising a statutory embargo on the approval of the scheme of
amalgamation. 9 Further, the disclosure of all material information to the shareholders,
which included the pendency of criminal proceedings; inspection proceedings
under Section 209A of the Act, and proceedings under Section 235 of the Act in the
report of the Official Liquidator under Section 394(1) of the Act constitute jurisdictional
requirements, and unless all of them were satisfied, the Company Court had no
jurisdiction to sanction the scheme. 10

 The proposed scheme was a ruse to stifle further inquiry into the affairs of the transferor
and transferee company and their managements which have been initiated by the Ministry
of Company Affairs, as also criminal and civil proceedings that may arise thereafter

8
Miheer H. Mafatlal Vs. Mafatlal Industries Ltd. (1997) 1 SCC 579
9
Securities and Exchange Board of India Vs. Sterlite Industries (India) Ltd. (2003) 113 Comp Cas 273.
10
Carona Ltd. Vs. Parvathy Swaminathan & Sons (2007) 8 SCC 559.

7|Page
 because after the amalgamation, it may not be possible to initiate any proceedings against
the transferor company as it would cease to exist.11

 In light of the serious findings in the inspection report under Section 209A of the Act,
sanction of the scheme would be detrimental to public interest, more so when on sanction
of the scheme of amalgamation, the transferor company would cease to exist, losing its
entity and in the process its functionaries will go scot free.

JUDGEMENT

Allowing the appeal the court held that the proviso to Section 391 (2) requires a company to
"disclose pendency of any investigation in relation to the company under Sections 235 to 351,
and the like". Though it is true that inspection under Section 209A of the Act, strictly speaking,
may not be in the nature of an investigation, but at the same time it cannot be construed as an
innocuous exercise for record, in as much as if anything objectionable or fraudulent in the
conduct of the affairs of the company is detected during the course of inspection, it may lay the
foundation for the purpose of investigations under Sections 235 and 237 of the Act, as is the case
here. Therefore, existence of proceedings under Section 209A must be disclosed in terms of the
proviso to Section 391(2). In any event, we are of the opinion that since the said issue is a
question of fact, based on appreciation of evidence, and both the Courts below have held that the
information supplied was sufficient, particularly in light of the order passed by the Single Judge
on 18th March, 2006, we are not inclined to disturb the said concurrent finding of the Courts
below, particularly when it is not shown that the said finding suffers from any
demonstrable perversity.12

Before filing the affidavit, the said official had not examined and applied its mind to the findings
contained in the inspection report under Section 209A of the Act. While it is true that it was not
within the domain of the Official Liquidator to determine the relvancy or otherwise of the said

11
J.S. Davar & Anr. Vs. Dr. Shankar Vishnu Marathe & Ors. A.I.R. 1967 Bom. 456.
12
Firm Sriniwas Ram Kumar Vs. Mahabir Prasad & Ors. 1951 SCR 277.

8|Page
report, yet he was obliged to incorporate in his affidavit the contents of the inspection report. We
are convinced that the official liquidator had failed to discharge the statutory burden placed on
him under the second proviso to Section 394(1) of the Act.

Further it was held that it will neither be proper nor feasible to lay down absolute parameters in
this behalf. The effect of misdemeanour on the part of the official liquidator on the scheme as
such would depend on the facts obtaining in each case and ordinarily the Company Judge should
be the final arbiter on that issue. In the instant case, indubitably, the findings in the report
under Section 209A of the Act were placed before the Company Judge, and he had considered
the same while sanctioning the scheme of amalgamation. Therefore, in the facts and
circumstances of the present case, the Company Judge had, before him, all material facts which
had a direct bearing on the sanction of the amalgamation scheme, despite the aforestated lapse on
the part of the Official Liquidator. In this view of the matter, the court was of the considered
opinion that the Company Judge, having examined all material facts, was justified in sanctioning
the scheme of amalgamation, particularly when the current investigation under Section 235 of
the Act was initiated pursuant to a complaint filed by respondent No.1 subsequent to the order of
the Company Judge sanctioning the scheme.

CONCLUSION

The Supreme Court allowed a scheme of amalgamation of Sesa Goa Limited (SGL) and Sesa
Industries Ltd (SIL). The court made it clear that the scheme of amalgamation will not come in
the way of any civil or criminal proceedings arising pursuant to the action under Companies Act
or filed by minority shareholders who had challenged the amalgamation.

Inspection under S. 209-A, is not in the nature of investigation, but it may be foundation for
investigation under Ss. 235 or 237 if anything objectionable or fraudulent in conduct of affairs of
company is detected during course of inspection. Inspection report under S. 209-A was
considered by Company Court before sanctioning scheme of amalgamation despite lapse of
Official Liquidator in not disclosing said report. Concurrent findings of courts below held that
information supplied was sufficient, which findings do not suffer from any perversity. Further,

9|Page
investigation under S. 235 has no bearing since it was initiated subsequent to sanctioning of
scheme of amalgamation. Hence, held, Company Judge, having considered all material facts
which had direct bearing on sanction of scheme of amalgamation, was justified in sanctioning
the same.

When the law requires that there should be two independent reports, it is clear that the statutory
provision has not been complied with. SIL being a subsidiary of SGL, the amalgamation between
both the said companies would entail several benefits for both the companies, including
consolidation of the management, control and operation of both companies thereby resulting in
considerable savings by elimination of duplication of administrative expenses etc. Moreover,
according to the learned counsel, the shareholders of SIL, including the appellant, will also stand
to gain tremendously by allotment of shares of SGL, a very healthy company.

Since the scheme which gets sanctioned by the court would be binding on the dissenting
minority shareholders or creditors, the court is obliged to examine the scheme in its proper
perspective together with its various manifestations and ramifications with a view to finding out
whether the scheme is fair, just and reasonable to the concerned members and is not contrary to
any law or public policy.13

13
Hindustan Lever Employees Union Vs. Hindustan Lever Ltd. & Ors. 1995 Supp (1) SCC 499.

10 | P a g e
 BIBLIOGRAPHY

 https://indiankanoon.org/doc/1737209/
 https://www.scconline.com/Members/NoteView.aspx?citation=(2011)%203%20SCC%2
0218&&&&&40&&&&&SearchPage
 https://www.caclubindia.com/forum/case-laws-at-one-place-164878.asp
 https://indiacorplaw.in/2011/02/supreme-court-on-section-394-sesa-v.html
 https://www.lawyerservices.in/SESA-Industries-Ltd-Versus-Krishna-H-Bajaj-and-
Others-2011-02-07

11 | P a g e