National Law Institute University, Bhopal: Case Comment: Miheer H. Mafatlal v. Mafatlal

- CASE COMMENT: MIHEER H. MAFATLAL V. MAFATLAL INDUSTRIES LTD.
, AIR 1997 SC 506-
NATIONAL LAW INSTITUTE UNIVERSITY,

BHOPAL
Case Comment: Miheer H. Mafatlal v. Mafatlal

Industries Ltd., AIR 1997 SC 506-
LAW RELATING TO B U S I N E S S A S S O C I AT I O N II P R O J E C T
Submitted to:
Prof Ishaq Qureshi
Submitted by:
Adyasha Das 2008 BA LLB 72
‘VIII’ Trimester
-SUBMITTED BY ADYASHA DAS-

- CASE COMMENT: MIHEER H. MAFATLAL V. MAFATLAL INDUSTRIES LTD., AIR 1997 SC 506-
T ABLE OF C ONTENTS
T AB L E OF C A SE S ..................................................................................................................1
D E CL ARA T I O N BY A U T H O R ...............................................................................................2
I NT RO DUC T I O N ......................................................................................................................3
R E SE ARCH M E T H O D O LO G Y ...............................................................................................4
S E CT IO N 391: A N A N A L Y S I S .............................................................................................6
S E CT IO N 391(2): A N I N SI G H T ........................................................................................10
S E CT IO N 392........................................................................................................................13
392
F ACT S O F TH E C A SE ..........................................................................................................15
I NT E RP RE T A T I O N OF TH E S UP RE M E C O URT ON J URIS DICT IO N UNDE R
S E CT IO NS 319 AND 393.....................................................................................................18

393
J UDG M E N T OF T H E S U P R E M E C O URT ..........................................................................20
1. Whether the transferee company concealed the special interest of the director Arvind
Mafatlal before getting the assent of the shareholders?.................................................20
2. Whether the scheme is unfair and unreasonable to the minority shareholders?...........21
3. Whether the propose scheme of amalgamation was unfair and amounted to

suppression of minority shareholders represented by the appellant and hence liable to
be rejected?........................................................................................................................23
4. Whether a separate meeting was require to be convened on the basis that the appellant
group represented a special class?...................................................................................23
5. Whether the exchange ratio was unfair and unreasonable to the shareholders of
Mafatlal Industries Ltd.?..................................................................................................24
A UT HO RIT I E S AFTER MAFATLA

ALL ..................................................................................25
C O NCL USI O N ........................................................................................................................27
B IB L IO G R A P H Y ....................................................................................................................28

T ABLE OF C ASES
1. Chembra Orchards Produce Ltd v Regional Director of Company Affairs, AIR 2009 SC
1278....................................................................................................................................25
2. GL Sultania v. Securities and Exchange Board of India, AIR 2007 SC 2172...................25
3. Hindustan Lever Employee's Union v. Hindustan Lever Ltd. and Ors., AIR 1995 SC 470.
............................................................................................................................................19
4. Masukhlal v. Shah Liquidator of Hathi Singh Mfg. Co., 46 Comp Cases 279 (Guj).........13
5. Meghal Home v. Shree Niwas Girni KK Samiti and Ors., AIR 2007 SC 3079.................25
6. Miheer H. Mafatlal v. Mafatlal Industries Ltd., AIR 1997 SC 506.....................................3
7. Re: Alabama, New Orleans, Texas and Pacific junction Railway Company, 1891 (1) C D
213......................................................................................................................................19
8. Re: Anglo-Continental Supply Co. Ltd., (1992) 2 Ch. 723...............................................19
9. Re: Hind Lever Chemicals Ltd., [2005] 58 SCL 211 (P&H).............................................11
10. Re: Hind Lever Chemicals Ltd., 3 Com Cases 57 (Rangoon)............................................12
11. Re: Manekchowk & Ahmedabad Mfg. Co. Ltd, [1970] 40 Com Cases 819 (Guj)...............8
12. Re: Mankam Investments Ltd. and Ors., (1995) 4 Comp LJ 330.......................................19
13. Re: Sakarmari Steel and Alloys Ltd., [1981] 51 Com Cases 266 (Bom).....................11, 26
14. S.K. Gupta v. KP Jain, 49 Comp Cases 342 (SC)..............................................................13
15. Sovereign Life Assurance Co. v. Dodd, [1892] 2 QBD 573 CA..........................................8
Page1

D ECLARATION BY A UTHOR
‘THE TEXT REPORTED IN THE PROJECT IS THE OUTCOME OF MY OWN EFFORTS
AND NO PART OF THIS REPORT HAS BEEN COPIED IN ANY UNAUTHORIZED MANNER AND
NO PART IN IT HAS BEEN INCORPORATED WITHOUT DUE ACKNOWLEDGEMENT’
RIJOY BHAUMIK
2007 BA LLB
60
A-0748

I NTRODUCTION
In recent times since the rapid growth in the economy and the
participation of foreign players in the Indian market, there have been many
cases of mergers of companies. This could be between a big and strong
company and a weak, non-performing company or between two giants for a
better position in the global market. The act of a merger between companies
is a court driven process. The law makers have understood the importance of
the involvement of the court in this process because the interest of the
shareholders has to be kept in mind. Otherwise it could very well happen that
a foreign player or a few influential persons in the company can merger or
amalgamate for their vested interest and cause irreparable loss to the
shareholders.
The role of the court though is limited under the law, but still it’s
strategic. As we go on to see in the judgment the role of the court is like that
of an umpire in a cricket match. It is completely supervisory. The court can
only see whether the required compliances and processes have been carried
out properly. It cannot suggest its own scheme or make recommendations to
the company. The role of the court will be studied in detail in the case of
Miheer Mafatlal v. Mafatlal Industries 1 .
1
Miheer H. Mafatlal v. Mafatlal Industries Ltd., AIR 1997 SC 506.

R ESEARCH M ETHODOLOGY
 PURPOSE OF STUDY
This project aims to study the difference between Section 391 and 392 of the
Companies Act, 1956 according to the judgment of Miheer H. Mafatlal v. Mafatlal Industries
Ltd.
 SOURCES OF DATA
The researcher has used both primary and secondary sources of information for the
purposes of this paper.
The paper involves a detailed reading of the material on the topic. They include:
 Books and articles by eminent and reputed authors on the topic.
 Further the study involves a detailed reading of substantial case law and
judgments on the subject.
 MAIN ISSUES COVERED
The following issues have been studied:
1. What are the facts of this case?
2. What does Sections 391 and 392 entail?
3. What was the judgment such delivered by the Supreme Court?
4. Judgements after this case as delivered by different Courts.
 FOOTNOTING
The researcher has followed a uniform style of footnoting throughout.
 SCOPE AND LIMITATIONS

The paper considers the substantive difference between the Sections 391 and 392 of
the Companies Act, 1956 throught the eyes of the Supreme Court in Miheer H. Mafatlal v.
Mafatlal Industries Ltd.
A limitation on the project is that, the author has restricted himself in studying only
the difference between 391 and 392 of the Companies Act, 1956 and the judgment of the
afore-mentioned case. The researcher has also tried to analyse subsequent judgments of the
Supreme Court in lieu of the judgment in Miheer H. Mafatlal v. Mafatlal Industries Ltd..

S ECTION 391: A N A NALYSIS

Section 391: Power to compromise or make arrangements with creditors and
members: Section 391 is derived from the English Company Law in the Companies Act,
1985
Under sections 1 to 7 of the Insolvency Act, the directors and the administrator or
liquidator of a company may propose a voluntary arrangement with the company’s creditors.
Under section 425 of the Company’s Act, 1985 a company can also enter into a compromise
or arrangement with its creditors and also its members or any class without going into
liquidation. Schemes of arrangement under section 425 have a wider potential than voluntary
arrangements under the Insolvency Act and can be used for an agreed merger of two
companies subject to the requirements of the section as to consent of the members and the
court. Voluntary arrangements were introduced to provide for a cheaper and quicker way of
making a composition with the creditors.
Palmer’s Company Law gives the scope of the section as follows:
a. The aid of the section may be invoked when it is not otherwise possible to make some
arrangement or compromise which would be in the interests of the company and the other
parties to the arrangement
b. It can be used whether the company is a going concern or is in the course of winding up
c. It will not normally be necessary to invoke the section where it is desired to alter rights
attached by the Articles to a class of shares
d. The value of the section is even more clearly shown where creditors are concerned. Prima
facie no creditor can be bound by the agreement of the company with the other creditors
or by an agreement between the latter.

A compromise approved by a great majority of creditors might be rendered ineffective
if a comparatively small number of creditors were to object and to stand up against it. It is
one of the purposes of section 425 to meet this situation. The effect of the scheme under this
section is: ‘to supply by recourse to the procedure thereby prescribed, the absence of the
individual agreement by every member of the class to be bound by the scheme which would
otherwise be necessary to give it validity’
‘Power to compromise’ explained: The power stated here is the power of the
company to enter into a compromise or arrangement. A power is different from the object and
one cannot normally expect a company to provide for a power to compromise and enter into
arrangement in its memorandum. However with regard to amalgamation it has been
interpreted that a company can by following the procedure in section 17 obtain the power to
amalgamate even subsequently. In this situation any scheme approved by the court will be
conditional upon the company acquiring a specific power to enter into amalgamation by
altering its memorandum.
Scope of Sub-section (1): An understanding of the terms used in this section will give
the scope of this section.
Meaning of Creditor: Every person having a pecuniary claim against the company
whether actual or contingent is a creditor. 2 In the case Seksaria Cotton Mills Ltd. v. AE Naik
it was held that while at the time of sanctioning of the scheme the Sales Tax Dept had a claim
against the company even though the claim might have been a future claim or even a
contingent claim, the Sales Tax Dept was a creditor of the company and was bound by the
scheme as an unsecured creditor.
Meaning of Member: Section 41 of the Indian Companies Act defines a member:
2
Halsbury’s Laws of England

1. The subscribers to the Memorandum of a Company shall be deemed to have agreed to
become members of the company and on its registration shall be entered as members in
its register of members.
2. Every other person who agrees in writing to become a member of a company and whose
name is entered in its register of members shall be a member of the company.
Meaning of Class: In Sovereign Life Assurance Co. v. Dodd3 the court found that
persons whose interests were dissimilar had been treated as a single class and accordingly it
refused to sanction the scheme.
In Re: Manekchowk & Ahmedabad Mfg. Co. Ltd 4 it was stated that a group of persons
would constitute one class when it shown that they have conveyed all interest and their
claims are capable of being ascertained by any common system of valuation. The group
styled as a class should ordinarily be homogenous and must have commonality of interest and
the compromise offered to them must be identical.
The position with respect to classes is as follows:
a. Creditors can divided into three categories of preferential creditors, secured creditors and
unsecured creditors
b. All preferential creditors who have no security for their debts can be treated as one class
whether or not some are secured and some unsecured
c. All unsecured creditors will normally form a single class except where some of them have
conflicting interests from others.
d. In the case of secured creditors those who have a common security will comprise a class
e. The shareholders who are creditors are in no way a distinct class from the shareholders
who are not the creditors of the company
3
Sovereign Life Assurance Co. v. Dodd, [1892] 2 QBD 573 CA.
4
Re: Manekchowk & Ahmedabad Mfg. Co. Ltd, [1970] 40 Com Cases 819 (Guj).

f. Grouping workers of the company who are preferential creditors with other unsecured
creditors is incorrect
g. If rights of ordinary shareholders are to be altered but those of preference shareholders are
not touched a meeting of ordinary shareholders will be necessary but not of preference
shareholders.
h. If a meeting of the proper class has not been held the court may not sanction
i. If any class has no possible interest in the company, for example where the shareholders
have no entitlement because all the assets are exhaustible by the creditors the court may
sanction a scheme even if such class objects.

S ECTION 391(2): A N I NSIGHT

The effect of the consensus that emerges from the meeting of the members or
the creditors as the case may be is given under sub-section (2): “if the compromise or
arrangement is agreed to by a majority in number representing three-fourths in value
of the creditors or class of creditors or members or class of members, as the case may
be, present and voting then the court if sanctions the compromise or arrangement the
same will be binding on all creditors or creditors of the class or all members or
members of the class and also on the company”
The purpose of enacting this subsection is as follows: If a compromise or
arrangement is approved by a majority representing three-fourths in value, the subject
to the sanction of the court, the said compromise or arrangement will be binding on all
creditors, members and also by the company. This sub-section indicates that the will
of majority will prevail in successfully implementing a compromise or arrangement in
the interest of the company.
The sub-section also contains checks and balances to prevent the majority
from abusing its powers and suppressing the minority. They are:
a. The required majority for approving a compromise or arrangement as stipulated in the
section is three-fourths in value of the persons present and voting
b. The scheme or compromise should further be approved by the court
Unless both the conditions are satisfied a scheme cannot be implemented.
Palmer’s Company Law has commented on the rule of the majority requiring
passing the scheme: “the majority who vote in favour of the scheme must first be a
majority in number of those members of the class who are present and voting and
secondly it must be three fourths in value of the holding of such persons.”

Thus if there are 100 members voting of whom one member holds 901 shares
and the remainder holder one each, the 99 shareholders holding one share each cannot
force a scheme against the vote of the holder on the 901 shares because they don’t
muster three-fourths in value. Conversely that shareholders and 49 others could not
force a scheme against the votes of the remaining 50 because there would not be a
majority in number.”
In Re: Hind Lever Chemicals Ltd.5 the question before the court was whether
majority in number as envisaged in the sub-section should represent three-fourth of
the value of total creditors/shareholders or of the value of the creditors/shareholders
actually present and voting. The court held that the requirement of the section was of
the majority present and voting and not of the total creditors/shareholders.
Sanctioning of the scheme by the Court: The following are the duties of the court while
sanctioning the scheme. Where a scheme or compromise is presented to the court for sanction
under section 391 the court should examine it from three broad angles:
a. Whether statutory provisions have been complied with;
b. Whether the class of shareholders was fairly represented;
c. Whether the arrangement is such as a man of business would reasonably approve
In Re: Sakarmari Steel and Alloys Ltd.6 the role of the court was clearly laid
down and it was stated that the circumstances to be taken into consideration vary from
case to case. Some of them are:
a. The proposal for the scheme is made in good faith
b. The scheme is fair and reasonable
c. The scheme will yield to a smooth and satisfactory working
d. The scheme does not offend public or commercial morality
5
Re: Hind Lever Chemicals Ltd., [2005] 58 SCL 211 (P&H)
6
Re: Sakarmari Steel and Alloys Ltd., [1981] 51 Com Cases 266 (Bom).

e. The scheme is not detrimental to the interests of the creditors, members or public interest
It was held that section 391(1) is not a signpost but a check post where it is the
duty of the court to examine the scheme for itself. The obligation is greater because
such application is ex parte and it is not practical to give notice to the numerous
creditors or members of a company. A mere causal look is not enough. Various
factors can be examined such as:
a. Whether the company is qualified to sponsor a scheme, that is, if it is liable to be wound
up as defined in section 390 (a)?
b. What is the motive of the company or creditors in sponsoring a scheme?
c. Whether the company is really intending to save itself from liquidation or it wants to eat
up a part of whole of the principle amount of a particular class of its creditors?
d. Whether all creditors who are similar in that class are covered under the proposed
scheme?
It has been held in Lawrence Dawson v. J. Hormasjee7 that it is not the function of the
court to substitute its own scheme for the scheme presented to it for sanction and if the court
is of the opinion that unless some radical amendment is effected or the scheme is
fundamentally altered it ought not to be sanctioned it is the duty of the court to reject the
same.
7
Re: Hind Lever Chemicals Ltd., 3 Com Cases 57 (Rangoon).

S ECTION 392
This sub-section (1) of Section 392 provides the following:
a. After sanctioning a scheme of compromise or arrangement under section 391 the court
shall have power to supervise the carrying out of the compromise or arrangement
b. The court may either at the time of making the order or at any time thereafter give such
directions in regard to any matter or make such modifications in the compromise as it
may consider necessary for the proper working of the scheme
Normally one expects the role of the court to end immediately thereafter.
However, many a times it is noticed that a scheme which already approved by the
court and ordered under section 391(2) could not be implemented due to various
operational and other reasons with the result that an impasse is created. In this event
the option left for the parties concerned is to approach the court again with a request
to pass suitable directions or orders so that the scheme can work.
In S.K. Gupta v. KP Jain8 the Supreme Court explained the rationale of section
392. It was stated that this section intended to rectify or re-look into a matter in which
was previously before the court under section 391. If the court had overlooked some
of the ramifications in the matter bought for the first time then it can take a look at it
again either suo moto or on application of the party. This way the company and it
members or creditors can avoid going through the cumbersome procedure of
approaching the court under section 391 again. This way the court can help in
removing hitches and impediments in the implementation procedure of the scheme.
In Masukhlal v. Shah Liquidator of Hathi Singh Mfg. Co. 9 the court stated that
this section granted supervisory powers of a continuing nature even after the scheme
8
S.K. Gupta v. KP Jain, 49 Comp Cases 342 (SC).
9
Masukhlal v. Shah Liquidator of Hathi Singh Mfg. Co., 46 Comp Cases 279 (Guj).

was sanctioned the first time under section 391. The Parliament thought it fit to trust
the wisdom of the court rather than go back to the interested parties.

F ACTS OF THE C ASE

This case relates to disputes arising out of the amalgamation scheme between Mafatlal
Industries Ltd. and Mafatlal Fine Spinning and Manufacturing Company Ltd. It came on
appeal from a decision bench of Gujarat High Court after it affirmed the ruling of its Single
bench to approve a scheme of amalgamation sanctioned by the two companies herein. The
Transferee Company is inter alia into the business textile manufacturing and its registered
office is located in Ahmedabad. The Transferor Company is also into business of textile
manufacturing and has its registered office in Mumbai. The scheme of amalgamation was
considered by the shareholders of both the companies and was approved after the
enumeration of some valid advantages which included:
a. better and more efficient control in running of operations,
b. improvement in economies and administrative costs of the companies,
c. increasing the technological, managerial and financial resources of both the companies,
d. having a stronger and larger resource base and hence the risk bearing capacity of the
companies would be better
e. giving a boost to the exports of the companies and getting people trust a larger
amalgamated company is easier
f. more comprehensive sourcing and absorption of technology
g. flexibility in operations for the larger amalgamated entity because the number of plants
and units increase and hence more options to choose from
h. complementing the businesses of both the companies as against the current system where
they were competing with each other
These being the reasons proposed for the amalgamation the shareholders in both the
companies approved, based on the belief that it was going to be beneficial for the companies.

After the transferee company approached the High Court of Gujarat for sanction of the
scheme, the appellant of the transferor company filed his objections to the scheme.
It is to be noted that the objection to the scheme of amalgamation arose due to the
difference between the appellant and the managing director of the respondent company who
belonged to the same family. The people at the helm of affairs of the two companies are
Arvind Mafatlal and Miheer Mafatlal, who are cousins; the former in the transferee company
and the latter in the transferor company. The businesses of the Mafatlal group were started by
Mafatlal Gagalbhai and this was carried on by his sons Navinchandra and Bhagubhai. One of
the sons of Navinchandra is Arvind Mafatlal. Bhagubhai’s only son was Hemant Mafatlal.
The appellant herein, Miheer Mafatlal is the son of Hemant Mafatlal. One the death of
Navinchandra the business was managed by Arvind Mafatlal who was the eldest in the family
then. Around 1979 there was a dispute as to the holdings of the brothers of Arvind Mafatlal
and the appellant in the company Mafatlal Industries Ltd. To resolve this the members to the
dispute called for a family arrangement where a chartered account of repute prepared the
family arrangement, according to which as is contended by the appellant Arvind Mafatlal and
his two brothers agreed to transfer their holdings in Mafatlal Industries Ltd to Miheer
Mafatlal. But a dispute arose between the appellant and Arvind Mafatlal and the transfer was
not undertaking. But against this family arrangement, Arvind Mafatlal claimed that the said
arrangement was given a go-by and in stead there was a binding contract between himself
and the others including Miheer Mafatlal that they would transfer their holding in Mafatlal
Industries to Arvind Mafatlal. There were litigations pending with regard to these disputes
between Arvind Mafatlal and Miheer Mafatlal, where the former was trying to enforce the
contract he claimed was binding and the latter was saying the family arrangement was still
valid.

In the background of these disputes already existing that the scheme of merger of the
two companies was approved by the shareholders and was placed before the court for
approval. The appellant placed before the Court four primary contentions to state that the
scheme approved was not a valid one and was unfair to the appellant. The first contention
was that Arvind Mafatlal did not put forward and disclose in clear terms to the shareholders
of the transferee company the interests of the Arvind Mafatlal and his brother while getting
the approval from them. Hence it was submitted that the consent was vitiated. The second
contention was the scheme was unfair to the minority holdings of the appellant. The third
contention was regarding the exchange ratio arrived at and that it was unfair to the
shareholders of the transferee company. The exchange ratio was two equity shares to be
given for every 5 shares held by a shareholder. The fourth contention was that the appellant
represented a distinct class of shareholders and had to be part of a separate meeting before the
approval of the scheme was taken.

I NTERPRETATION OF THE S UPREME C OURT ON

J URISDICTION UNDER S ECTIONS 319 AND 393
The court before going into the disputes arising in this matter first looked into the
jurisdiction and the extent of its powers to decide on such matters. To look into this matter
the section 391, clauses (1) and (2) and section 393 (1) have to be read conjointly. It was
stated that on a perusal of the two sections it was clear that a court has to look into the
legality of the scheme. It was the duty of the court to see whether the scheme was unfair to a
section of the shareholders and whether their interested were being suppressed through the
scheme. The court was not to merely sanction the scheme just because it was approved by the
shareholders through a special majority. While exercising its powers under section 391 the
court had to be diligent in sanctioning the scheme after looking in to all the pros and cons.
On the question whether the court can go in to the minute details of the scheme and
suggest its own scheme, the court held that this was beyond the scope of the court’s authority.
The court has to appreciate the decision of the shareholders on the matter of the technicalities
under the scheme and if it feels that it is fair then it should approve it. It cannot replace its
own scheme and apply its own mind for an alternate scheme.
To show that the court only had supervisory jurisdiction the court also stated the law
under section 392 where the jurisdiction of the court continues beyond what is mentioned in
section 391. Under section 392 the court has the power to give effect to the scheme
previously sanctioned under section 391 if the parties approach it for clarifications and for
removal of difficulties in the scheme. As is seen in this section the role of the court is purely
supervisory.

There was reference to the English case of Re: Alabama, New Orleans, Texas and
Pacific junction Railway Company10 where the court held that its role was to see if the
provisions of the statute were complied with and whether there was anything unfair to the
minority shareholders. It has to also see that the majority are acting bona fide. The role of the
court was restricted to these only and cannot apply its mind to recommend its own scheme.
In the case of Re: Anglo-Continental Supply Co. Ltd.11, it was held that before
sanctioning the scheme the court was to see that the provisions of the statute were followed,
the class was fairly represented and the majority doesn’t coerce the minority in any adverse
manner and a man of business would reasonably approve such a scheme.
There was also reference to the Calcutta High Court judgment of Re: Mankam
Investments Ltd. and Ors.12 where it was held that it has to be left to the commercial wisdom
of the shareholders whether a merger or amalgamation is beneficial to the company in terms
of economizing, but the court can intervene if it thinks the minority shareholders are unfairly
prejudiced by it.
On the point about the jurisdiction of the Company Court under section 391 the court
finally looked in to the case of Hindustan Lever Employee's Union v. Hindustan Lever Ltd.
and Ors.13 where Justice Venkatachalaiah made it clear that merely because a merger will
result in a large market share for the merged entity the approval of the scheme by the
shareholders cannot be vitiated. The court can only intervene when there is any tax fraud or
any illegality in the scheme. A majority in the market share is not illegal nor is it against
public policy. In this case the amalgamation was necessary because the company TOMCO
was not performing well and was facing severe losses as a result of which it had to sell off
several of its assets.
10
Re: Alabama, New Orleans, Texas and Pacific junction Railway Company, 1891 (1) C D 213.
11
Re: Anglo-Continental Supply Co. Ltd., (1992) 2 Ch. 723.
12
Re: Mankam Investments Ltd. and Ors., (1995) 4 Comp LJ 330.
13
Hindustan Lever Employee's Union v. Hindustan Lever Ltd. and Ors., AIR 1995 SC 470.

J UDGMENT OF THE S UPREME C OURT

The court divided its judgment along five issues and delivered it accordingly. The following
are the substantive issues decided:
1. WHETHER THE TRANSFEREE COMPANY CONCEALED THE SPECIAL INTEREST OF THE
DIRECTOR ARVIND MAFATLAL BEFORE GETTING THE ASSENT OF THE SHAREHOLDERS?
Contentions of the Appellant: It was submitted by the appellant that the transferee company
did not place sufficient explanatory statement explaining the interest of the director Arvind
Mafatlal in the going through of the scheme. It was further contended that the company was
enjoined under section 393(1) to state the special interest of the directors if any in the scheme
and also the effect of the compromise and arrangement on such special interest.
Contentions of the Respondent: The Respondents represented by Senior Counsel Soli
Sorabjee on this point stated that a personal matter of family dispute had nothing to do with
the question of sanctioning of the scheme. The shareholders were not concerned about a
family feud and would only be concerned with the interests of the company which was
ensured here.
The Court agreed with the contentions of the Respondent and said that the family
dispute had no relevance to the scheme being sanctioned and there was no interest that the
director of the transferee company could gain out of this. The court analyzed the situation by
stating that, if the suit filed by Arvind Mafatlal against the appellant succeeds and the
appellant's counter-claim fails then all that would happen is that the appellant will have to sell
his share-holding which is only 5% in the transferee-company to the plaintiff Arvind
Mafatlal. That has nothing to do with the equity shareholders as a class which was called
upon to decide whether the scheme of merging the transferor-company MFL with the
transferee-company was for the benefit of the shareholders as a class. Conversely if the

appellant succeeded in his counter-claim and director Arvind Mafatlal lost in his suit then all
that would happen is that Arvind Mafatlal will have to transfer his shareholding and share-
holding of his group in favour of appellant so far as the transferee-company is concerned.
That future possibility would have no impact on the decision making process which the
equity shareholders of transferee-company had to undertake at this stage while approving the
Scheme. Consequently such an eventuality was totally irrelevant for being brought to the
notice of the equity shareholders before whom the scheme was put to vote. While deciding
whether transferor-company should be merged with the transferee-company and the
transferee-company's economic and industrial activity should be permitted to be enlarged as a
result of such merger the equity shareholders were least concerned whether the appellant
would purchase in future the share of the present director Arvind Mafatlal or vice versa.
So the court held that mention about such a personal interest was outside the statutory
requirements of section 393(1)(a).
2. WHETHER THE SCHEME IS UNFAIR AND UNREASONABLE TO THE MINORITY
SHAREHOLDERS?
Contentions of the Appellant: The appellant contended that in most family run and
controlled businesses the people who have been at the helm of affairs of the family have a
tendency to control the affairs and decisions of the company easily. In the present case also
Arvind Mafatlal was the head of the family who inherited much of the business and who
claimed was entitled to 50% shares through the binding contract. Through this the appellant
contended that he was able to wield influence the over the shareholders and the other
minority were hence voted out. The appellant also contended that there was pending litigation
in the Bombay High Court regarding the shareholding of the member of the family. It was
stated it the appellant wins the litigation then he gets larger shareholding in the company and

if that is not possible he could have got the family arrangement enforced through which he
could have got complete control over the transferor company.
Contentions of the Respondent: The respondent herein contended that it cannot be said that
Arvind Mafatlal had complete control over the shareholders through his statute and
personality because he and one another director were from the Mafatlal family and remaining
11 were not concerned with the family business. It was also said Arvind Mafatlal’s
shareholding was not even 50% even after taking in to account the holdings of subsidiaries in
which Arvind Mafatlal held shares. To the contention on the shareholdings and pending
litigation the counsel countered saying that if Arvind Mafatlal succeeded then the appellant
will have to transfer 5% holdings to Arvind Mafatlal. On the other hand if the appellant
succeeded then the shares of Arvind Mafatlal in the transferee company will be transferred to
him.
The Court on these arguments held that there was nothing unfair and unreasonable in
the approval of the scheme. It was seen that 95% shareholders present and voting, approved
the scheme. The court observed that only 16% of the shares voted in the meeting were from
Arvind Mafatlal and his concerns. About 44% was held by financial institutions that were
independent of any influence and even they voted in favour of the scheme. On the point about
the bona fides of the majority voters the court held that it has to be examined vis-à-vis the
scheme in question and not the person whose interest might be different from the interest of
the voters in the class. Further on this point the court held that the appellant had himself
chaired the meeting when the transferor company and its shareholders approved the scheme,
the appellant did not object to it then in order to secure his interest he claims now.

3. WHETHER THE PROPOSE SCHEME OF AMALGAMATION WAS UNFAIR AND AMOUNTED TO
SUPPRESSION OF MINORITY SHAREHOLDERS REPRESENTED BY THE APPELLANT AND
HENCE LIABLE TO BE REJECTED?
The court on this point used the contentions put forward by the two sides in the
previous issue to decide on this point. It held that even if the appellant succeeded in the
litigation pending, then he would acquire a greater share and might replace Arvind Mafatlal
as the Director and this would benefit him. Finally the company was benefitting the most
from the scheme of amalgamation. The appellant would be benefitted if he can succeed as the
Director to a larger company after the amalgamation. If his counter-claim in the litigation
fails then he has to leave the company after giving up his shares and the scheme will have no
effect on the interests of the appellant.
4. WHETHER A SEPARATE MEETING WAS REQUIRE TO BE CONVENED ON THE BASIS THAT
THE APPELLANT GROUP REPRESENTED A SPECIAL CLASS?
Contentions of the Appellant: It was contended that because of the family arrangement of
1979 on which he relies he was a special class of minority equity shareholder who had
separate rights against the director of the company and whose special interest because of the
pending litigation between him and the director Arvind Mafatlal, was likely to be adversely
affected by the Scheme, therefore, a separate meeting had to be convened as he represented a
class within the class of equity shareholders.
The Court negated this contention stating a separate meeting can be convened only
when the class of equity shareholders claiming for the separate meeting has any conflicting
interest with other shareholders. It is not a case here that the interests of the appellant were in
conflict with the general shareholders in any way. The appellant clash of interest was a
personal one with the director of the transferee company and not with the shareholders. It was

also not the case that the scheme offered to the appellant and his class was not different from
that offered to the others.
5. WHETHER THE EXCHANGE RATIO WAS UNFAIR AND UNREASONABLE TO THE
SHAREHOLDERS OF MAFATLAL INDUSTRIES LTD.?
Contentions of the Appellant: It was contended that the exchange ratio was favourable from
the transferor company’s point of view but not for the transferee company’s shareholders.
The Counsel for the appellant further submitted that the current proceedings being a
continuation of the High Court proceedings, this court should order for another expert
submission on the exchange ratio after realizing the difficulty that the appellant had not
submitted anything contrary to the report already submitted by the respondent before the
court. Further the counsel also produced the records of the companies to show the court the
earning per equity share to suggest a different exchange ratio.
But the court used the decision of the Gujarat High Court in Kamala Sugar Mills14to
hold that once the exchange ratio of the shares of the transferee-company to be allotted to the
shareholders of the transferor-company has been worked out by a recognized firm of
chartered accountants who are experts in the field of valuation and if no mistake can be
pointed out in the said valuation, it is not for the court to substitute its exchange ratio,
especially when the same has been accepted without demur by the overwhelming majority of
the shareholders of the two companies or to say that the shareholders in their collective
wisdom should not have accepted the said exchange ratio on the ground that it will be
detrimental to their interest.
14
Kamala Sugar Mills, (1984) 55 Com Cases 308.

A UTHORITIES AFTER M AFATLAL

In the case of GL Sultania v. Securities and Exchange Board of India 15, a company
was being taken over and the appellant challenged the valuation of the shares of the target
company done by the Respondents in consultation with the Merchant Bankers on the ground
that it was not in accordance with the parameters laid down in Regulation 20(5) of the
Securities and Exchange Board of India (Substantial Acquisition and Shares and Takeovers),
Regulations, 1997. It was contented that the price offered was very low. The Tribunal held
that the valuation of shares was arrived at after following the parameters in the Regulations
and thus could not be erroneous, arbitrary or unreasonable.
The court relied on the judgment of Miheer Mafatlal v. Mafatlal Industries Ltd. to
state that valuation of shares was a very complex issue was to be left to the decision of the
experts in the field. The court will not interfere with the process of evaluation unless it is
shown that a well accepted principle is departed from or violated or if the valuation contains
some very evident errors or there was a wrong approach in making the evaluation.
In the case of Meghal Home v. Shree Niwas Girni KK Samiti and Ors 16, a company
was under liquidation and then a scheme of compromise under section 391 was formulated.
Here the court referred to the decision in Miheer Mafatlal to state that provision of section
391 have to be complied with even for a company not under liquidation.
In the case of Chembra Orchards Produce Ltd v Regional Director of Company
Affairs17, the question was whether the application under section 391 (1) is required to be
heard and decided ex parte under the Company (Court) Rules, 1959. Here the court relied on
Miheer Mafatlal and Sakamari Steels and Alloys Lt.d18 to decide that at the stage of issuance
of Summons for Directions to convene a meeting, though the Company Judge has to apply its
15
GL Sultania v. Securities and Exchange Board of India, AIR 2007 SC 2172.
16
Meghal Home v. Shree Niwas Girni KK Samiti and Ors., AIR 2007 SC 3079.
17
Chembra Orchards Produce Ltd v Regional Director of Company Affairs, AIR 2009 SC 1278.
18
Supra n.6.

mind, prima facie, on the genuineness of the Scheme, basically the entire exercise is to verify
whether the numerous conditions prescribed in the Company Court Rules are satisfied.

C ONCLUSION
This case though in line with similar other cases before it still asserts itself very
strongly. It has in length expounded the application of section 391 to 393. The importance of
these sections is laid down clearly. The judgment has been a constant source of authority to
many others later as is seen. The judgment was used interesting metaphors such as the role of
the court being like the Umpire in a Cricket match to explain the authority and the extent of
its jurisdiction. It has also very strongly sidelined the many frivolous contentions regarding
the exchange ratio based on the earnings per equity share to establish the principle that the
role of the court is only to see whether anything illegal was performed in arriving at the
exchange ratio. Further it should be interesting to note that that the court has also worked on
equitable principles in dismissing the petition when it criticized the appellant for approving
the proposal of amalgamation the first time in the Transferor Company but later challenging
it after the transferee company approved it. This, the court noted as a discrepancy and used it
against the appellant’s contentions.

B IBLIOGRAPHY
BOOKS
 RAMAIYA A, GUIDE TO COMPANIES ACT, (ED CHANDRACHUD YV, DR. DUGGAR SM),
16TH EDN NAGPUR, WADHWA & PUBLICATIONS NAGPUR; 2006.
 SETH DUA & ASSOCIATES, JOINT VENTURES & MERGERS AND ACQUISITIONS IN INDIA,
LEXIS NEXIS BUTTERWORTHS: 2006.
 SINGH AVTAR, COMPANY LAW, EDN 15TH, EASTERN BOOK COMPANY: 2007.
 DR. VERMA J C, CORPORATE MERGERS AMALGAMATIONS AND TAKEOVERS, (ED DR.
KUMAR SANJEEV), 5TH EDN, BHARAT: 2008.
WEB RESOURCES
 HTTP://WWW.MANUPATRA.COM /
 HTTP:// WWW.INDIANKANOON.ORG/

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- CASE COMMENT: MIHEER H. MAFATLAL V. MAFATLAL INDUSTRIES LTD.

, AIR 1997 SC 506-

NATIONAL LAW INSTITUTE UNIVERSITY,

Case Comment: Miheer H. Mafatlal v. Mafatlal

Adyasha Das 2008 BA LLB 72

-SUBMITTED BY ADYASHA DAS-

I NT E RP RE T A T I O N OF TH E S UP RE M E C O URT ON J URIS DICT IO N UNDE R

S E CT IO NS 319 AND 393.....................................................................................................18

J UDG M E N T OF T H E S U P R E M E C O URT ..........................................................................20

2. Whether the scheme is unfair and unreasonable to the minority shareholders?...........21

3. Whether the propose scheme of amalgamation was unfair and amounted to

A UT HO RIT I E S AFTER MAFATLA

C O NCL USI O N ........................................................................................................................27

-SUBMITTED BY ADYASHA DAS-

2. GL Sultania v. Securities and Exchange Board of India, AIR 2007 SC 2172...................25

6. Miheer H. Mafatlal v. Mafatlal Industries Ltd., AIR 1997 SC 506.....................................3

8. Re: Anglo-Continental Supply Co. Ltd., (1992) 2 Ch. 723...............................................19

9. Re: Hind Lever Chemicals Ltd., [2005] 58 SCL 211 (P&H).............................................11

10. Re: Hind Lever Chemicals Ltd., 3 Com Cases 57 (Rangoon)............................................12

14. S.K. Gupta v. KP Jain, 49 Comp Cases 342 (SC)..............................................................13

-SUBMITTED BY ADYASHA DAS-

‘THE TEXT REPORTED IN THE PROJECT IS THE OUTCOME OF MY OWN EFFORTS

NO PART IN IT HAS BEEN INCORPORATED WITHOUT DUE ACKNOWLEDGEMENT’

-SUBMITTED BY ADYASHA DAS-

cases of mergers of companies. This could be between a big and strong

company and a weak, non-performing company or between two giants for a

a foreign player or a few influential persons in the company can merger or

of an umpire in a cricket match. It is completely supervisory. The court can

out properly. It cannot suggest its own scheme or make recommendations to

Miheer Mafatlal v. Mafatlal Industries 1 .

-SUBMITTED BY ADYASHA DAS-

purposes of this paper.

 Books and articles by eminent and reputed authors on the topic.

judgments on the subject.

 MAIN ISSUES COVERED

The following issues have been studied:

1. What are the facts of this case?

2. What does Sections 391 and 392 entail?

3. What was the judgment such delivered by the Supreme Court?

4. Judgements after this case as delivered by different Courts.

The researcher has followed a uniform style of footnoting throughout.

 SCOPE AND LIMITATIONS

-SUBMITTED BY ADYASHA DAS-

Mafatlal Industries Ltd.

-SUBMITTED BY ADYASHA DAS-

S ECTION 391: A N A NALYSIS

making a composition with the creditors.

Palmer’s Company Law gives the scope of the section as follows:

parties to the arrangement

attached by the Articles to a class of shares

or by an agreement between the latter.

-SUBMITTED BY ADYASHA DAS-

A compromise approved by a great majority of creditors might be rendered ineffective

otherwise be necessary to give it validity’

arrangement in its memorandum. However with regard to amalgamation it has been

altering its memorandum.

the scope of this section.

scheme as an unsecured creditor.

Meaning of Member: Section 41 of the Indian Companies Act defines a member:

-SUBMITTED BY ADYASHA DAS-

1. The subscribers to the Memorandum of a Company shall be deemed to have agreed to

its register of members.