of British and American Trustees (supra), were as under:
"A company carried on business in the United Kingdom and in America, and a portion of its investments and some of its share holders were in that country. Differences having arisen between the directors in England and the American committee, it was agreed that the American share holders should take over the American investments upon the terms that the company should cease to carry business in America and that the capital of the company should be reduced by the amount of the shares held in America. A special resolution for carrying out this agreement was passed and confirmed. All the creditors of the company had either been paid or had assented to the arrangement."
24. Holding that the arrangement was not ultra virus the company and should be sanctioned by the Court, the House of Lords observed that it was not beyond the statutory jurisdiction of the Court under the Companies Act to sanction a scheme for reduction of capital of a company which does not deal in the same way with all shares of the same class. In the process the Court distinguished Denvor Hotel (supra), adn explained the ratio of Trevor v. Whitworth (supra).
25. Lord Herschell, LC, after quoting Re. Denvor Hotel Co. (supra), made following significant observations:
"If all the share holders of a company were of opinion that its capital should be reduced, and that this reduction would best be effected by paying off one shareholder and cancelling the shares held by him, I cannot see anything in the CA Nos.331 & 280 of 2005 in Co. Pet. No.95/2004 Page 17 of 24 Acts of 1867 and 1877, which would render it incumbent on the Court to refuse to confirm such a resolution, or which shows that it would be ultra virus to do so. I do not see any danger in the conclusion that the Court has power to confirm such a scheme as that now in question, or, any reason to doubt that this was the intention of the Legislature. The interests of creditors are not involved, and I think it was the policy of the Legislature to entrust the prescribed majority of the share holders with the decision whether there should be a reduction of capital, and if so, how it should be carried into effect. The interests of the dissenting minority of the share holders (if there be such) are properly protected by this: that the decision of the majority can only prevail upon it be confirmed by the Court. This is a complete answer to the argument ably urged by Counsel for the respondent that if all the share holders of the same class were not dealt with in precisely the same fashion, the interests of the minority might be unjustly scarified to those of the majority. There can be no doubt that any scheme which does not provide for uniform treatment of share holders whose rights are similar, would be most narrowly scrutinised by the Court, and that no such scheme ought to be confirmed unless the Court be satisfied that it will not work unjustly or inequitably. But this is quite a different thing from saying that the Court has no power to sanction it."
26. One will find, on going through this judgment, that one of the arguments raised was that reduction of the capital was not proportionate but aimed at a particular class. Lord Watson in his judgment specifically dealt with this aspect and negatived the contention. He relied solely upon the plea that it is beyond the statutory jurisdiction of the Courts to sanction any scheme for the reduction of capital which does not deal in precisely the same way with each and every share belonging the same class. If that be the law it is manifest that in some cases the result might be unfortunate. Apart from the interest of creditors, the question whether each member shall have his share proportionately reduced, or whether some members shall retain the shares unreduced, the shares of others being extinguished upon their receiving a just equivalent, is purely domestic matter, and it may be greatly for the CA Nos.331 & 280 of 2005 in Co. Pet. No.95/2004 Page 18 of 24 advantage of the company that the latter alternative should be adopted. Lord Macnaghten described that the provisions of the Companies Act, 1867, while permitting a company to reduce its share capital provided sufficient safeguards to ensure that all categories were duly protected. His Lordships observed:
"The exercise of the power is fenced round by safeguards which are calculated to protect the interests of creditors, the interests of share holders, and the interests of the public. Creditors are protected by express provisions. Their consent must be procured, or their claims must be satisfied. The public, the share holders, and every class of share holders, individually and collectively, are protected by the necessary publicity of the proceedings, and by the discretion which is entrusted to the Court until confirmed by the Court the proposed reduction is not to take effect, though all the creditors have been satisfied. When it is confirmed the memorandum is to be altered in the prescribed manner, and the company, as it were, makes a new departure.
With these safeguards, which are certainly not inconsiderable, the Act apparently leaves the company to determine the extent, the mode, and the incidence of the reduction, and the application or disposition of any capital moneys which the proposed reduction may set free."
20. No doubt, in that case since the company had given option to such shareholders to continue to hold shares. However, it would be of interest to note that M/s. Reckitt Benckiser (India) Ltd. passed special resolution proposing the reduction of equity capital which resulted in depriving those shareholders also from holding the shares any longer. Scheme for this purpose was filed for approval and by means of Co. Pet. No.228 of 2010 which has been approved by the Company Judge vide orders dated 03.10.2011 dismissing the objections of those minority shareholders. The same very contentions were advanced CA Nos.331 & 280 of 2005 in Co. Pet. No.95/2004 Page 19 of 24 which was raised before us by the application. Following discussion from the said judgment is also worth to reproduce:
"41. In Organon (India) Ltd. (supra) another Single Judge of Bombay High Court specifically rejected the argument of forcible acquisition of public shareholders in context of a Scheme of Reduction. In the said judgment, it held as under:-
"13. Mr. Lakhani has first submitted that such reduction of the share capital proposed by the petitionercompany, by paying off the public holders of equity shares, other than the promoter shareholders and given them certain compensation, amounts to a forceful acquisition of the shares held by them. He states that such action on the part of the petitioner-company is against the principles of natural justice, corporate democracy and corporate governance. He states that such reduction tantamount to a sophisticated corporate mafiaism.
xxx xxx xxx xxx
19. This Court is, however, bound by the decision of the Division Bench of this Court, reported in Sandvik Asia Ltd. v. Bharat Kumar Padamsi [2009] 91 CLA 247 [2009] 111 (4) Bom. LR 1421, concerning the reduction of capital of Sandvik Asia Ltd. The learned Single Judge of this court, had refused confirmation of the proposal for reduction of Sandvik Asia Ltd. on the ground that the promoters group could virtually bulldoze the minority shareholders and purchase their shares at the price dictated by them. The learned Single Judge found that the minority shareholders were not given any option under the proposal. Hence, the learned Single Judge concluded that such schemes for reduction of capital were totally unfair and unjust. In appeal, the Hon‟ble Division Bench held that they were bound by the law laid down by the Hon‟ble Apex Court in Ramesh B Desai v. Bipin Vadilal Mehta [2006] 73 CLA 357/[2006] 5 SCC 638 (SC) where the Apex Court recognised the judgment of the House of Lords in the case of British & American Trustee & Finance Corporation (supra). The Learned Bench also referred to the judgment in Poole v. National Bank of China Ltd. [1907] AC 229 (HL), the relevant portion of which is as follows:
"19.The dissenting shareholders do not demand, and never have demanded, better pecuniary terms, CA Nos.331 & 280 of 2005 in Co. Pet. No.95/2004 Page 20 of 24 but they insist on retaining their holdings which in all reasonable probability can never bring profit to any of them and may be detrimental to the company."
20. The learned Bench granted sanction to the reduction of capital, overruling the order of the learned Single Judge in Sandvik Asia Ltd. (supra), and posited as follows:
"Once it is established that non-promoter shareholders are being paid the fair value of their shares, at no point of time it is even suggested by them that the amount that is being paid is way less and even the overwhelming majority of nonpromoter shareholders having voted in favour of the resolution shows that the court will not be justified in withholding its sanction to the resolution." [para 9]
21. An SLP [Petition for Special Leave to Appeal (Civil) No. 12418/2009] filed therefrom, was dismissed by the Hon‟ble Apex Court, by its order dated 13th July, 2009. Thus, this Court is bound by the decision of the learned Division Bench and cannot withhold sanction to the special resolution for reduction of capital, unless there is some patent unfairness regarding the fair value of the shares or there is lack of an overwhelming majority of non-promoter shareholders who vote in favour of the resolution."
(emphasis supplied) xxx xxx xxx
44. It is also settled law that a valuer‟s report is not to be interfered with by a Court in the absence of any fraud or illegality - which allegation is missing in the present petition. In fact, Supreme Court in Hindustan Lever Employees' Union v. Hindustan Lever Ltd., 1995 Supp (1) SCC 499 has held "Mr. Ashok Desai, appearing on behalf of TOMCO, has argued that the valuation of shares had to be done according to well-known methods of accounting principles. The valuation of shares is a technical matter. It requires considerable skill and experience. There are bound to be differences of opinion among accountants as to what is the correct value of the shares of a company. It was emphasised that more than 99% of the shareholders had approved the valuation. The test of fairness of this valuation is not whether the offer is fair to CA Nos.331 & 280 of 2005 in Co. Pet. No.95/2004 Page 21 of 24 a particular shareholder. Mr Jajoo may have reasons of his own for not agreeing to the valuation of the shares, but the overwhelming majority of the shareholders have approved of the valuation. The Court should not interfere with such valuation."(emphasis supplied)."
20. This answers most of the arguments of the applicants.
21. One other aspect remains to be considered, viz., arguments of the applicants that the entire this is designed in such a way to control 100% equity by Sharma Family and to eliminate minority shareholders like applicants and this motive in extinguishing the entire class of outside shareholders was improper and Court could look into this aspect. The question is as to whether it was an unfair or inequitable arrangement. As pointed out above, it has been held by the Court that merely because the arrangement results in extinguishing some shares and resulting into 100% shareholdings in the hands of a particular group cannot be treated improper per se.
22. Coming to the valuation, I find that the auditors adopted profit earning method, which is held to be a valid method for on- going concern. In its letter dated 04.12.2003, the Chartered Accounts gave their justification in the following manner:
"In our opinion, CCI Valuation seems to be most appropriate as both companies are unlisted companies, no realistic future cash flows can be projected for either of the companies as the tourism trade as well as investment business at stock exchanges are of highly volatile nature and data available for hotel companies pertain to either hotel chains or those owing five star properties.
We enclose herewith the calculation sheets for the valuation of the shares of the respective companies on the basis of CCI guidelines which give the respective valuations as under:
"Company „HPL‟ - Rs.38,028 per share (share of Rs.100 each) CA Nos.331 & 280 of 2005 in Co. Pet. No.95/2004 Page 22 of 24 Company „SHRL‟ - Rs.2.30 per share (share of Rs.10 each)"
On the aforesaid basis, the share exchange ratio in reverse merger of „HPL‟ into „SHRL‟ translates into 16533 shares of „SHRL‟ of Rs.10 each being issued for each share held in „HPL‟.
The present share capital of „HPL‟ is 18,180 shares of Rs.100 each aggregating to Rs.18,18,000. If the above share exchange ratio is maintained, it would mean issue by „SHRL‟ 30,05,69,940 shares of Rs.10 each to the shareholders of „HPL‟ in lieu of the shares held in „HPL‟. The aggregate share capital of „SHRL‟ in such a case would exceed Rs.300 crores, post amalgamation and the expanded equity share capital of „SHRL‟ after allotment of shares to the shareholders of „HPL‟ would make it extremely difficult for the company to service its shareholders."
23. Mr. Vohra may be right in his submission that the events had taken place after the amalgamation and the circumstances under which profitability of the company has increased cannot be relevant consideration for valuation of the shares or to judge the profitability of the company at the time when the decision for amalgamation was taken for the stake holders. Therefore, the report filed by the applicants also cannot be accepted.
35. We may also refer to the following observations of the Supreme Court in the case of Hindustan Lever Employees Union v. Hindustan Lever Limited [1995] (Suppl.) (1) SCC 499:
"The Court's obligation is to be satisfied that the valuation was in accordance with law and it was carried out by an independent body.... The valuation of shares is a technical matter. It requires considerable skill and experience. There are bound to be differences of opinion among accountants as to what is the correct value of the shares of a company. It was emphasised that more than 99% of the share CA Nos.331 & 280 of 2005 in Co. Pet. No.95/2004 Page 23 of 24 holders had approved the valuation. The test of fairness of this valuation is not whether the offer is fair to a particular shareholder.... Mr. Jajoo may have reasons of his own for not agreeing to the valuation of the shares, but the overwhelming majority of the share holders have approved of the valuation. The Court should not interfere with such valuation."
24. Apart from showing the effect of this amalgamation, the applicants have not been able to show ulterior motives. We, thus, do not find any merit in these applications, which are accordingly dismissed.
(A.K. SIKRI) JUDGE June 01, 2012 pmc .