Judicial Analysis Court Copy Headnote Facts Arguments Court observation

2019 Supreme(SC) 514

SUPREME COURT OF INDIA
R.F. Nariman, Vineet Saran, JJ.
63 MOONS TECHNOLOGIES LTD. (FORMERLY KNOWN AS FINANCIAL TECHNOLOGIES INDIA LTD.) & ORS. – APPELLANT
VERSUS
UNION OF INDIA & ORS. – RESPONDENT
CIVIL APPEAL NO. 4476 OF 2019 (Arising out of Special Leave Petition (Civil) No. 4210 of 2018) WITH CIVIL APPEAL NO. 4478 OF 2019 (Arising out of Special Leave Petition (Civil) No.4652 of 2018) WITH CIVIL APPEAL NO. 4477 OF 2019 (Arising out of Special Leave Petition (Civil) No.4239 of 2018) WITH CIVIL APPEAL NO. 4479 OF 2019 (Arising out of Special Leave Petition (Civil) No.4659 of 2018) WITH CIVIL APPEAL NO. 4481 OF 2019 (Arising out of Special Leave Petition (Civil) No.4816 of 2018) WITH CIVIL APPEAL NO. 4480 OF 2019 (Arising out of Special Leave Petition (Civil) No. 4720 of 2018) WITH WRIT PETITION (CIVIL) NO.368 OF 2019
Decided On : 30-04-2019

Advocates Appeared:
For Petitioner(s) (SLP 4210/2018): Mr. Mukul Rohatgi, Mr. Mahesh Agarwal, Mr. Ankur Saigal, Ms. Misha Rohatgi, Ms. Shaneen Parikh, Ms. Namita Shetty, Mr. Himanshu Satija, Ms. Tanvi Manchanda, Ms. Priyanka Vora, Mr. E. C. Agrawala
(SLP 4659/2018) : Dr. A.M. Singhvi, Sr. Mr. Mahesh Agarwal, Mr. Ankur Saigal, Mr. Aviskar Singhvi, Mr. Himanshu Satija, Ms. Tanvi Manchanda, Mr. E. C. Agrawala
(SLP 4652/2018) : Mr. Arvind Lakhawat, Mr. Harshwardhan Reddy, Mr. Amit Agrawal
(SLP 4239/2018) : Ms. Diksha Rai Ms. Palak Mahajan, Mr. Ishan Bisht, Adv.
(SLP 4816/2018) : Mr. Nakul Mohta, Mr. Ardhendumauli Kumar Prasad
(SLP 4720/2018) : Mr. Saurabh Kirpal, Mr. Rahul G. Tanwani, Mr. V.C. Shukla, Mr. VNL Sindura, Mr. Nikhil Goel
(WP 368/2019) : Mr. Arvind Lakhawat, Ms. Ranjeeta Rohatgi
For Respondent(s): Mr. Vikas Mehta Mr. Varun Singh, Ms. Anushree Menon, Ms. Nupur Desai, Ms. Samiksha Godiyal, Ms. Sanam Tripathi, Adv.
Union of India : Mr. Tushar Mehta, SG Ms. Pinky Anand, ASG Mr. R. Balasubramanian, Mr. Shekhar Vyas, Mr. Rajesh Ranjan, Ms. Pratima Gupta, Mr. Anup Dawan, Mr. Joel, Ms. Snidha Mehra, Mr. Sumit Teterwal, Mr. Chakitan Vikram Shekher Papta, Ms. Kirti Dua, Ms. Saudamini Sharma, Mr. Hemant Arya, Ms. Tanisha Samanta, Mr. Anmol Chandan, Ms. Shraddha Deshmukh, Mr. Sai Krishna, Mr. A.K. Sharma
R-6 : Mr. Neeraj Kishan Kaul, Mr. D.N. Ray, Mr. Chirag Manubhai Shah, Ms. Sanjana Saddy, Mr. Lokesh K. Choudhary Mr. Dillip Kumar Nayak, Ms. Disha Ray, Mr. Sanjay Lodha, Mr. Devanshu Sajlan, Mrs. Sumita Ray
SEBI : Mr. Arvind P. Datar, Mr. Pratap Venugopal, Ms. Surekha Raman, Ms. Viddusshi, Mr. Akhil A. Roy, For M/s K.J. John & Co. Mr. Mukesh Kumar Maroria

IMPORTANT POINTS
Protection to section 396 under Article 31A does not extend to administrative orders passed thereunder.
Word ‘order’ in Article 31A should be read ejusdem generis to its preceding words. So read, the ‘order’ in Article 13(3) refers to legislative orders and not administrative orders.
Order passed u/s 396 must conform to fundamental rights guaranteed by Articles 14 and 19(1)(g).
Impugned order of amalgamation was not made in public interest.
Section 396(3) refers to the economic loss to be borne by shareholders and members of both companies to amalgamation.
Economic value of shares is an important factor.

Headnote:(a) Constitution of India - Article 31A - Law providing for amalgamation of two or more corporations in public interest - Immune from challenge on grounds relatable to Article 14 or Article 19 - Section 396 of the Companies Act, 1956 held such a law. (Para 21)
       (b) Companies Act, 1956 - Section 396 r/w Articles 14, 19 and 31A - Immunity under Article 31A from challenge on ground of Article 14 and 19 - Does not mean that Section 396 must be construed in such a fashion that it would lead to arbitrary or unreasonable results. (Para 23)
       (1983) 4 SCC 616; [1970] 2 SCR 10 - Relied upon
       (1997) 7 SCC 463; (2001) 2 SCC 386; (2002) 3 SCC 496 - Referred
       (c) Companies Act, 1956 - Section 396 - Protected under Article 31A, Constitution of India - Protection to section 396 - Does not extend to administrative orders passed thereunder. (Para 25, 27)
       (1978) 3 SCC 459; (1987) 2 SCC 720 - Referred
       (d) Interpretation of statute - Ejusdem generis - Article 13(3), Constitution of India - Word ‘order’ - Whether administrative or legislative - Held, will take colour from preceding words ‘Ordinance, rule, regulation, notification’ which are all legislative in nature, and not administrative - Hence the ‘order’ in Article 13(3) does not refer to administrative orders. (Para 27)
       (e) Companies Act, 1956 - Section 396(5) - Order passed under Section 396 - Directly impacting the rights and liabilities of the companies sought to be amalgamated and their shareholders and creditors - Not an order in general applying to all such companies, but only to particular companies sought to be amalgamated - Making a specific direction qua two specific companies to be amalgamated - Held, such an order not in the nature of legislation or delegated legislation. (Para 29)
       (1987) 2 SCC 720; (1987) 4 SCC 431 - Relied upon
       (1996) 8 SCC 407; (2000) 8 SCC 655; [1969] 2 SCR 866 - Distinguished
       (f) Constitution of India - Articles 14 and 19(1)(g) r/w section 396, Companies Act, 1956 - Order passed following general rule of conduct laid down by section 396 - Must conform to fundamental rights guaranteed by Articles 14 and 19(1)(g) - It is the substance of what is effected that counts when it comes to infraction of a fundamental right, and not the form. (Para 33, 34)
       [1959] Supp (1) SCR 274; [1960] 2 SCR 671; [1962] 3 SCR 842; (1981) 1 SCC 722; (1987) 1 SCC 395 - Relied upon
       (g) Companies Act, 1956 - Section 396 - Satisfaction of Central Government - Must be as to the conditions precedent mentioned - Must be based on facts showing existence of conditions precedent - Facts must show that it is essential in public interest to amalgamate two or more companies - Formation of satisfaction if on irrelevant or imaginary grounds would vitiate exercise of power. (Para 42)
       (1969) 1 SCC 817; [1966] Supp SCR 311; [1969] 3 SCR 108; (1969) 1 SCC 817; [1970] 2 SCR 177; [1975] 2 SCR 93; (1975) 2 SCC 81; (1994) 6 SCC 651; (2008) 4 SCC 144 - Relied upon
       1989 Supp (2) SCC 201 - Distinguished
       (h) Companies Act, 1956 - Section 396 - Essential facts to determine public interest in compulsory amalgamation of companies - Application of mind by Central Government whether compulsory amalgamation indispensably necessary, important in the highest degree, and is both basic and necessary. (Para 44)
       (1999) 5 SCC 138 - Relied upon
       (i) Companies Act, 1956 - Section 396 - Public interest - General interest of the community, as distinguished from the private interest of an individual - “Public interest” in instant context would mean combining of resources of two or more companies for impacting production and consumption of goods and services and employment of persons relatable thereto for the general benefit of the community. (Para 54)
       [1952] 3 SCR 889; (2018) 13 SCC 491; (1983) 2 SCC 195; (1992) 4 SCC 305; (1986) 3 SCC 20; (2003) 7 SCC 309; 1995 Supp (1) SCC 499; (2012) 13 SCC 61 - Relied upon
       (2010) 1 Bom CR 513 - Cited with approval
       (j) Companies Act, 1956 - Section 396 - Condition precedent - Report of FMC I 2013 that recovery of Rs.6000 crores from defaulters was not possible by NSEL creating an emergent financial situation - Government deciding to amalgamate NSEL and FTIL - However, by the time final amalgamation order was issued the recoveries had started and Rs.835.88 crores recovered and decrees and awards to the tune of Rs.3365 crores obtained - The emergent situation for order of amalgamation had disappeared by the time the final order was issued in 2016 - Satisfaction of Central Government must appear from the order itself - No interest of the general public as opposed to the businesses of the two companies referred to in the final order of amalgamation - Held, order of amalgamation not made in public interest. (Para 56, 58, 59, 63)
       (1978) 1 SCC 405 - Relied upon
       (2006) 10 SCC 645; (2010) 6 SCC 614; (2014) 13 SCC 692 - Distinguished
       (k) Companies Act, 1956 - Section 396(3) - “Interest in” or “rights against” referring to real and substantive rights of investors and creditors - Section 396(3) refers to the economic loss to be borne by shareholders and members of both companies to amalgamation. (Para 65)
       (l) Companies Act, 1956 - Section 396 - Rights and Interest of shareholders - Market value of shares determines net worth of a company - If after amalgamation market value of shares goes down, dividend of shareholders will be impacted - Economic value of shares is an important factor. (Para 71, 72)
       [1955] 1 SCR 876; (1986) 1 SCC 264; [1966] 2 SCR 367; (1997) 1 SCC 579 - Relied upon
       (m) Companies Act, 1956 - Section 396(3A) - Statutory appeal against assessment of compensation - Available only if compensation is assessed - In case of no assessment no question of appeal - Instantly, prescribed authority not passing an order of even ‘nil’ compensation - In case of non-assessment, as instantly, there is no question of appeal - Remedy lies in a challenge in judicial review proceedings under Article 226, Constitution of India - High Court could then remand the matter for determining compensation - Held, instantly, Section 396(3) has not been followed either in letter or in spirit. (Para 75)
       [1986] 3 SCR 1049; [1991] Supp (1) SCR 251; (1990) 1 SCC 613 - Relied upon
       (1971) 1 Ch. 34; (1974) 42 D.L.R. (3d) 323; (1974) 1 N.Z.L.R. 29; (1977) 2 N.Z.L.R. 472 - Referred
       Facts of the case:
       The appellant, 63 Moons Technologies Ltd. (hereinafter referred to as “FTIL”, which name was changed to 63 Moons Technologies Ltd. on 27.05.2016), is a 99.99% shareholder of the National Spot Exchange Ltd. (hereinafter referred to as “NSEL”), and is a listed company. FTIL is a profitable company, having a positive net worth of over INR 2500 crore, and is in the business of providing software which is used for trading by brokers and exchanges across the country. FTIL has about 900 employees, and a Board of Directors which is different from the Board of Directors of its wholly owned subsidiary, i.e., NSEL. On the other hand, NSEL was incorporated in 2005 by Multi Commodities Exchanges [“MCX”] and its nominees. On 05.06.2007, the Union of India issued an exemption notification under Section 27 of the Forward Contracts (Regulation) Act, 1952 [“FCRA”] exempting forward contracts of one-day duration for sale and purchase of commodities traded on NSEL from operation of the provisions of the FCRA. NSEL commenced operations in October 2008. On 27.04.2012, the Department of Consumer Affairs [“DCA”] issued a show cause notice to NSEL as to why action should not be initiated against it for permitting transactions in alleged violation of the exemption granted to it under the FCRA. The DCA directed NSEL to give an undertaking that no further contracts shall be launched until further instructions, and that all existing contracts will be settled on due dates. This was effectively a “freezing” order. On 22.07.2013, NSEL gave an undertaking to the DCA.
       Sometime in July 2013, 13,000 persons who traded on the platform of NSEL claimed to have been duped by other trading members (being 24 in number), who defaulted in payment of obligations amounting to approximately INR 5600 crore. NSEL suspended trading and closed its spot exchange operations w.e.f. 31.07.2013. The Forward Markets Commission [“FMC”] directed a forensic audit of NSEL, and the Union of India, on 30.09.2013, ordered inspection of the books of accounts of NSEL and FTIL under Section 209A of the Companies Act. On the same day, the Economic Offences Wing [“EOW”] registered cases against Directors and key management personnel of the NSEL and FTIL, trading members of NSEL, and brokers of NSEL under various provisions of the Indian Penal Code and the Maharashtra Protection of Interest of Depositors Act, 1999 [“MPID Act”]. Several suits were filed by the traders who allegedly have been duped, the most important of which is Suit No.173 of 2014 pending in the Bombay High Court, which is a representative suit filed under Order I Rule 8 of the Code of Civil Procedure, 1908 [“CPC”]. NSEL also filed third-party notices in the said suit for recovery of INR 5600 crore against 24 defaulter traders. It has also filed various arbitration proceedings against them, and is in the process of recovery of INR 3365 crore out of INR 5600 crore, which are in the form of court decrees and arbitration awards.
       The FMC passed an order declaring that FTIL was not “fit and proper” to hold equity in any commodity exchanges, and must dilute its shareholding to not more than 2% of the paid-up equity capital of MCX. The said order is under challenge in Writ Petition No. 337 of 2014 before the Bombay High Court.
       On 21.10.2014, a draft order of amalgamation, made in accordance with Section 396(3) of the Companies Act, was circulated to the relevant stakeholders. As a result, FTIL filed Writ Petition No. 2743 of 2014 on 10.11.2014, in which it challenged the impugned draft order. On 16.12.2014, the Union of India filed an affidavit in reply, categorically confirming that the impugned draft order has been made by the Central Government. On 04.02.2015, the Bombay High Court passed an order allowing FTIL, NSEL, and their shareholders to file their objections to the draft amalgamation order. Meanwhile, under Section 396(3), a compensation order was made on 01.04.2015, which involved compensation only to a particular shareholder of NSEL. On 28.08.2015, the Central Government issued a notification to merge the functions of the FMC with the Securities and Exchange Board of India [“SEBI”] w.e.f. 28.09.2015. On the same day, the FCRA was also repealed. Thus, SEBI was now vested with the powers of the FMC which is to be governed by the Securities and Exchange Board of India Act, 1992 [“SEBI Act”].
       On 12.02.2016, a final amalgamation order was passed in terms of Section 396(3), thereby merging FTIL and NSEL, wherein all assets and liabilities of NSEL would become assets and liabilities of FTIL. The writ petition already filed was amended on 28.03.2016 to include a challenge to this order. On 04.12.2017, the impugned judgment of the Bombay High Court was passed in which the said writ petition was dismissed.
       Finding of the Court:
       Order of amalgamation is ultra vires section 396.
       Result: Writ petition disposed of.

Prior History: From the Judgment and dated 04.12.2017 of the HIGH COURT OF JUDICATURE AT BOMBAY in WP-2743-2014 [2017 0 Supreme(Mah) 1851]

JUDGMENT

R.F. NARIMAN, J.

1. Leave granted.

2. This batch of appeals and writ petition raises questions as to the applicability and construction of Section 396 of the Companies Act, 1956, which deals with compulsory amalgamation of companies by a Central Government order when this becomes essential in the public interest. The appellant, 63 Moons Technologies Ltd. (hereinafter referred to as “FTIL”, which name was changed to 63 Moons Technologies Ltd. on 27.05.2016), is a 99.99% shareholder of the National Spot Exchange Ltd. (hereinafter referred to as “NSEL”), and is a listed company. About 45% of the shareholding of FTIL is held by Shri Jignesh Shah and family, and about 43% of the shareholding is held by members of the Indian public. Approximately 5% of the shareholding is held by institutional investors. FTIL is a profitable company, having a positive net worth of over INR 2500 crore, and is in the business of providing software which is used for trading by brokers and exchanges across the country. FTIL has about 900 employees, and a Board of Directors which is different from the Board of Directors of its wholly owned subsidiary, i.e., NSEL. On the other hand, NSEL was incorporated in 2005 by Multi Commodities Exchanges [“MCX”] and its nominees. NSEL provided an electronic platform for trading of commodities between willing buyers and sellers through brokers representing them. On 05.06.2007, the Union of India issued an exemption notification under Section 27 of the Forward Contracts (Regulation) Act, 1952 [“FCRA”] exempting forward contracts of one-day duration for sale and purchase of commodities traded on NSEL from operation of the provisions of the FCRA. NSEL commenced operations in October 2008. On 27.04.2012, the Department of Consumer Affairs [“DCA”] issued a show cause notice to NSEL as to why action should not be initiated against it for permitting transactions in alleged violation of the exemption granted to it under the FCRA. NSEL replied to the show cause notice on 29.05.2012 stating that it had not violated the exemption granted to it. Without adjudicating upon the show cause notice, on 12.07.2013, the DCA directed NSEL to give an undertaking that no further contracts shall be launched until further instructions, and that all existing contracts will be settled on due dates. This was effectively a “freezing” order. On 22.07.2013, NSEL gave an undertaking to the DCA.

3. Earlier, in January 2013, representatives of MMTC Ltd., a Government of India undertaking, which was one of the trading members of NSEL, visited some of the warehouses which were at different locations in order to verify stocks therein and reported existence of full commodity stock in the said warehouses. Sometime in July 2013, 13,000 persons who traded on the platform of NSEL claimed to have been duped by other trading members (being 24 in number), who defaulted in payment of obligations amounting to approximately INR 5600 crore. Due to the sudden and abrupt stoppage of fresh contracts, and media reports about the same, market participation on NSEL’s platform reduced considerably, forcing NSEL to suspend trading and close its spot exchange operations w.e.f. 31.07.2013. The Forward Markets Commission [“FMC”] recommended to the DCA on 12.08.2013 that steps be taken to verify quantity and quality of commodities at various warehouses; financial status of buyers and trading members be ascertained, and the liability be fixed on promoters of NSEL, i.e., FTIL. On 14.08.2013, NSEL issued a press release in which Shri Sinha, its CEO/MD, made a statement that he and his management team were responsible for all operations at NSEL. On 27.08.2013, the FMC directed a forensic audit of NSEL by Grant Thornton LLP, and the U

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2019 Supreme(SC) 514

Cases Referred (44)