# 63 MOONS TECHNOLOGIES LTD. (FORMERLY KNOWN AS FINANCIAL TECHNOLOGIES INDIA LTD.) & ORS v. UNION OF INDIA

- **Citation:** [2019] 8 S.C.R. 26
- **Court:** Supreme Court of India
- **Decided:** 2019-04-30
- **Case number:** Civil Appeal No. 4476 of 2019
- **Bench:** R. F. Nariman, Vineet Saran
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/63-moons-technologies-ltd-formerly-known-as-financial-technologies-india-ltd-34068
- **Pages:** 111

## Headnote

Companies Act, 1956: s.396 - Constitutionality of - Held:
s.396 provides for compulsory amalgamation of companies in public
interest - Art.31A of the Constitution envisages that any "law"
providing for the amalgamation of two or more corporations in public
interest is immune from challenge on grounds relatable to Art.14 or
Art.19 of the Constitution of India - s.396 of the Companies Act is
such a law - Constitution of India - Arts.14, 19 and 31A.
Companies Act, 1956: s.396 - Derivative immunity of the
Central Government order - Whether the Central Government's order
made under s.396 would also receive the protective umbrella of
Art.31A, given the fact that s.396 is undoubtedly protected by Art.31A
- Whether order of Central Government passed under s.396 is
administrative in nature - Held: The expression "law", as defined
in Art.13(3)(a), includes an Ordinance, rule, regulation, notification,
and custom or usage having in the territory of India the force of
law - Obviously, therefore, when the expression "order" is used, it
would take colour from Ordinance, rule, regulation, notification,
which are all legislative in nature, and not administrative - Even
custom or usage having the force of law refers to general rules of
conduct, as opposed to administrative orders passed on the facts of
a case - However, the Central Government's order in question
directly impacts the rights and liabilities of the companies, their
shareholders and creditors, sought to be amalgamated under the
order - Such order is not an order in general which applies to all
such companies, but only to the particular companies sought to be
amalgamated and does not lay down any general rule of conduct
by itself, but in fact, follows the general rule of conduct laid down
[2019] 8 S.C.R. 26
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by s.396 - Therefore, such an order is not in the nature of legislation
or delegated legislation - The fact that, under s.396(5), the Central
Government order has to be laid before the Houses of Parliament
does not detract from the fact that the order is administrative and
not legislative in character - Constitution of India - Art.13(3).
Companies Act, 1956: s.396 - Essentiality test - Held: The
Central Government has to be "satisfied", meaning thereby, that it
must, on certain objective facts, come to a conclusion that
amalgamation between two or more companies is necessary - This
can only be done if the Central Government finds it "essential",
i.e., necessary to do so.
Companies Act, 1956: s.396 - Public interest - Meaning of -
In the context of compulsory amalgamation of two or more
companies, the expression "public interest" would mean the welfare
of the public or the interest of society as a whole, as contrasted
with the "selfish" interest of a group of private individuals - Thus,
"public interest" may have regard to the interest of production of
goods or services essential to the nation so that they may contribute
to the nation's welfare and progress, and in so doing, may also
provide much needed employment - "Public interest" in this context
would, therefore, mean the combining of resources of two or more
companies so as to impact production and consumption of goods
and services and employment of persons relatable thereto for the
general benefit of the community - Conversely, any action that
impedes promotion of industry or obstructs growth which is in
national or public interest would run counter to public interest as
mentioned in s.396 of the Act.
Companies Act, 1956: s.396(3) - Amalgamation order -
Compensation - Right of shareholder or a creditor - s.396(3) speaks
of a shareholder's or a creditor's interest in or rights against the
company resulting from an amalgamation order - A shareholder or
creditor gets effected by an amalgamation order if the value of his
share gets depleted as a result of the amalgamation and if dividends
that have been paid to him are likely to come down as a result of the
amalgamation - Likewise, a cr

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63 MOONS TECHNOLOGIES LTD.
(FORMERLY KNOWN AS FINANCIAL
 TECHNOLOGIES INDIA LTD.) & ORS.
v.
UNION OF INDIA
(Civil Appeal No. 4476 of 2019)
APRIL 30, 2019
 [R. F. NARIMAN AND VINEET SARAN, JJ.]
Companies Act, 1956: s.396 - Constitutionality of - Held:
s.396 provides for compulsory amalgamation of companies in public
interest - Art.31A of the Constitution envisages that any "law"
providing for the amalgamation of two or more corporations in public
interest is immune from challenge on grounds relatable to Art.14 or
Art.19 of the Constitution of India - s.396 of the Companies Act is
such a law - Constitution of India - Arts.14, 19 and 31A.
Companies Act, 1956: s.396 - Derivative immunity of the
Central Government order - Whether the Central Government's order
made under s.396 would also receive the protective umbrella of
Art.31A, given the fact that s.396 is undoubtedly protected by Art.31A
- Whether order of Central Government passed under s.396 is
administrative in nature - Held: The expression "law", as defined
in Art.13(3)(a), includes an Ordinance, rule, regulation, notification,
and custom or usage having in the territory of India the force of
law - Obviously, therefore, when the expression "order" is used, it
would take colour from Ordinance, rule, regulation, notification,
which are all legislative in nature, and not administrative - Even
custom or usage having the force of law refers to general rules of
conduct, as opposed to administrative orders passed on the facts of
a case - However, the Central Government's order in question
directly impacts the rights and liabilities of the companies, their
shareholders and creditors, sought to be amalgamated under the
order - Such order is not an order in general which applies to all
such companies, but only to the particular companies sought to be
amalgamated and does not lay down any general rule of conduct
by itself, but in fact, follows the general rule of conduct laid down
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by s.396 - Therefore, such an order is not in the nature of legislation
or delegated legislation - The fact that, under s.396(5), the Central
Government order has to be laid before the Houses of Parliament
does not detract from the fact that the order is administrative and
not legislative in character - Constitution of India - Art.13(3).
Companies Act, 1956: s.396 - Essentiality test - Held: The
Central Government has to be "satisfied", meaning thereby, that it
must, on certain objective facts, come to a conclusion that
amalgamation between two or more companies is necessary - This
can only be done if the Central Government finds it "essential",
i.e., necessary to do so.
Companies Act, 1956: s.396 - Public interest - Meaning of -
In the context of compulsory amalgamation of two or more
companies, the expression "public interest" would mean the welfare
of the public or the interest of society as a whole, as contrasted
with the "selfish" interest of a group of private individuals - Thus,
"public interest" may have regard to the interest of production of
goods or services essential to the nation so that they may contribute
to the nation's welfare and progress, and in so doing, may also
provide much needed employment - "Public interest" in this context
would, therefore, mean the combining of resources of two or more
companies so as to impact production and consumption of goods
and services and employment of persons relatable thereto for the
general benefit of the community - Conversely, any action that
impedes promotion of industry or obstructs growth which is in
national or public interest would run counter to public interest as
mentioned in s.396 of the Act.
Companies Act, 1956: s.396(3) - Amalgamation order -
Compensation - Right of shareholder or a creditor - s.396(3) speaks
of a shareholder's or a creditor's interest in or rights against the
company resulting from an amalgamation order - A shareholder or
creditor gets effected by an amalgamation order if the value of his
share gets depleted as a result of the amalgamation and if dividends
that have been paid to him are likely to come down as a result of the
amalgamation - Likewise, a creditor of a solvent company is directly
effected by an amalgamation by which the amount loaned by such
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creditor becomes, as a result of the amalgamation, less likely to be
paid back in time, than if the amalgamation did not take place -
Every shareholder of a company and indeed, every creditor of a
company, is concerned only with the "economic value" of his share
or the loan granted to a company, as the case may be - The moment
the share value, in real terms, is likely to dip, and/or loans granted
are likely not to be repaid in time or at all as a result of an
amalgamation, such members or creditors of the amalgamating
company are equally entitled to be compensated for this economic
loss as are the members and creditors of the amalgamated company,
depending on the facts of each case - To the extent to which the
interest or rights of such member or creditor are less than his interest
or rights against the original company, post amalgamation, he shall
be entitled to compensation which is to be assessed.
Companies Act, 1956: ss.396(3), 396(3A) - Compensation to
aggrieved person - The language used in the appeal provision, i.e.
s.396(3A), is "any person aggrieved by any assessment of
compensation made by the prescribed authority under sub-section
(3) may...... appeal to the Tribunal, and thereupon the assessment
of the compensation shall be made by the Tribunal" - The prerequisites for the application of sub-section (3A) are that a person
first be aggrieved by an "assessment of compensation" "made" by
the prescribed authority - Where no assessment of compensation
whatsoever is made by the prescribed authority, no person can be
aggrieved by an order which does not assess any compensation,
which may be interfered with by the Appellate Tribunal which must
then assess the compensation for itself - The statute clearly entitles
such shareholders and creditors to have compensation assessed
first by the prescribed authority and then by the appellate authority
- The orders of "non-assessment" by the prescribed authority can
more appropriately be challenged in judicial review proceedings,
in which the High Court, acting under Art.226 of the Constitution
of India can, if an infraction of s.396(3) is found, send the matter
back to the prescribed authority to determine compensation after
which the right of appeal under sub-section (3A) of s.396 would
then follow.
Companies Act, 1956: s.396 - Applicability of - Compulsory
amalgamation of companies by a Central Government's order in
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public interest - NSEL, a 99.99% subsidiary of FTIL, defaulted on
nearly 5,600 crore payments to its 13,000 investors - Trading was
suspended in NSEL after payments default - Order of compulsory
amalgamation of NSEL with appellant (FTIL) under s.396 - Whether
each of the conditions precedent for applicability of s.396 applied
to the facts of the instant case - Held: There is no doubt that in
July, 2013, as a result of NSEL stopping trading on its exchange, a
payment crisis of Rs.5600 crore arose - The letter addressed by
FMC to the Ministry of Corporate Affairs show that immediate
reason for amalgamation, according to the FMC was that NSEL, as
a corporate entity, was financially and physically incapable of
effecting any substantial recovery from defaulting members - By
the time final amalgamation order was passed, emergent situation
of 2013 which required emergent step of compulsory amalgamation
by the passage of time, disappeared - Decrees/awards worth
Rs.3365 crore were obtained against the defaulters, with Rs. 88
crore crystallised by the committee set up by the High Court, pending
acceptance by the High Court, even without using the financial
resources of FTIL as an amalgamated company - What was
emergent, and essential, even according to the FMC and the
Government in 2013-2014, was, therefore, largely redressed in 2016,
by the time the amalgamation order was made - Therefore, the
essentiality test, which is the condition precedent to the applicable
to s.396, was not satisfied - When it comes to public interest as
opposed to the private interest of investors/traders who have not
been paid, the amalgamation order at several places refers to
"essential public interest" as if "essential" goes with "public
interest" instead of being a separate and distinct condition precedent
to the exercise of power under s.396 - All the expressions used in
relation to "public interest" have relation only to the businesses of
the two companies that are sought to be amalgamated - The
leveraging of combined assets, capital, and reserves is for the
purpose of only settling liabilities of certain stakeholders and
creditors when the order is read as a whole, and given the fact that
the businesses of the two companies were completely different - So
far as achieving economy of scale and efficient administration is
concerned, it is difficult to see how this would apply to the fact
situation in this case where NSEL is admittedly a company which
has stopped functioning as a commodities exchange with no hope
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of any revival - Government order itself reflects the net worth of
NSEL as INR 8.86 crore despite its capital being INR 60 crore,
inasmuch as the total reserve and surplus is a negative figure of
INR 51.54 crore - As against this, FTIL's balance sheet, as on
31.03.2015, discloses that for the same year, FTIL's net worth is
INR 2779.94 crore - Also, FTIL paid high dividends to its
shareholders while NSEL never paid a single dividend ever since
its inception - This would show that Post amalgamation dividend
payable to the shareholders of FTIL is bound to come down -
Correspondingly, the 'marketable value' of such shares will also
fall - The 'economic value' of shares held in FTIL may, post
amalgamation, depress the market value of shares held by such
shareholder, and would also impact the dividend payable on such
shares post amalgamation - Further no compensation is provided
either to the shareholders or creditors of FTIL for the economic
loss caused by the amalgamation which is breach of s.396(3) - This
is a case where there is complete non-application of mind by the
authority assessing compensation to the rights and interests which
the shareholders and creditors of FTIL have and which are referred
to in s.396(3) of the Act - This being the case, it is clear that s.396(3)
was not followed either in letter or in spirit - The amalgamation
order is, therefore, ultra vires s.396 and being arbitrary and
unreasonable, violative of Art.14 of the Constitution of India.
Disposing of the matters, the Court
HELD: 1. INTERPRETATION OF SECTION 396: There
is no doubt whatsoever that Section 396 cannot be challenged on
the ground of Article 14 or Article 19, given Article 31A of the
Constitution of India. However, this does not mean that Section
396 must be construed in such a fashion that it would lead to
arbitrary or unreasonable results. [Para 23] [61-A-B]
Prem Nath Raina v. State of Jammu & Kashmir and Ors.
(1983) 4 SCC 616 : [1983] 3 SCR 536 ; Budhan Singh
and Anr. v. Nabi Bux and Anr.[1970] 2 SCR 10
- relied on.
2. DERIVATIVE IMMUNITY OF THE CENTRAL
GOVERNMENT ORDER: The expression used in Article 31A
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is "law", for which, one is to see the definition contained in Article
13(3). "Law" in Article 13(3) certainly includes "order". The only
question is whether this would include an administrative order
as well. It is clear, on a reading of Article 13(3), that the
expression "law", as defined in Article 13(3)(a), includes an
Ordinance, rule, regulation, notification, and custom or usage
having in the territory of India the force of law. Obviously,
therefore, when the expression "order" is used, it would take
colour from Ordinance, rule, regulation, notification, which are
all legislative in nature, and not administrative. Even custom or
usage having the force of law refers to general rules of conduct,
as opposed to administrative orders passed on the facts of a given
case. Construing Article 31A in the light of Article 13(3)(a), it is
clear that the "order" referred to, can therefore, only be a
legislative order. [Paras 24, 26, 27] [62-C; 63-G; 64-A-C]
Union of India and Anr. v. Cynamide India Ltd. and
Anr. (1987) 2 SCC 720 - relied on.
Prag Ice & Oil Mills v. Union of India (1978) 3 SCC
459 : [1978] 3 SCR 293 - Partly applicable.
3. WHETHER THE CENTRAL GOVERNMENT ORDER IS
ADMINISTRATIVE IN NATURE
3.1 The fact that, under Section 396(5), the Central
Government order has to be laid before the Houses of Parliament
does not detract from the fact that this order is administrative
and not legislative in character. The Central Government's order
directly impacts the rights and liabilities of the companies, their
shareholders and creditors, sought to be amalgamated under the
order. Such order is not an order in general which applies to all
such companies, but only to the particular companies sought to
be amalgamated. Such an order is not in the nature of legislation
or delegated legislation. The order passed under Section 396 is
qua particular companies and does not lay down any general rule
of conduct by itself, but in fact, follows the general rule of conduct
laid down by Section 396. Thus, the Central Government order,
made under Section 396, must conform to the fundamental rights
guaranteed by Articles 14 and 19(1)(g) of the Constitution of India.
[Paras 29, 33] [67-D-E; 70-B]
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K.I. Shephard v. Union of India (1987) 4 SCC 431 :
[1988] 1 SCR 188; Thomas Dana v. State of Punjab
[1959] 1 Suppl. SCR 274 ; Hamdard Dawakhana
(Wakf) Lal Kuan, Delhi and Anr. v. Union of India and
Ors. [1960] 2 SCR 671 ; Sakal Papers (P) Ltd. and
Ors. v. Union of India [1962] 3 SCR 842 ; Ajay Hasia
and Ors. v. Khalid Mujib Sehravardi and Ors. (1981)
1 SCC 722 : [1981] 2 SCR 79 ; M.C. Mehta and Anr.
v. Union of India and Ors. (Shriram - Oleum Gas)
(1987) 1 SCC 395 : [1987] 1 SCR 819 - relied on.
New Bank of India Employees' Union and Anr. v. Union
of India and Ors. (1996) 8 SCC 407 : [1996] 3 SCR
322; Quarry Owners' Association v. State of Bihar and
Ors. (2000) 8 SCC 655 : [2000] 2 Suppl. SCR 211 ;
J.K. (Bombay) (P) Ltd. v. New Kaiser-i-Hind Spinning
and Weaving Co. Ltd. [1969] 2 SCR 866 -
held inapplicable.
3.2 Various pre-requisites contained in Section 396 must
first be satisfied before the Section can be said to operate. First
and foremost, the Central Government has to be "satisfied",
meaning thereby, that it must, on certain objective facts, come to
a conclusion that amalgamation between two or more companies
is necessary. This can only be done if the Central Government
finds it "essential", i.e., necessary to do so. Also, this can only
be done in "public interest". A condition precedent to the passing
of an order by the Central Government under this Section is that
every member or creditor of each of the companies before
amalgamation shall have, as nearly as may be, the same interest
in or rights against the company resulting from the amalgamation
as he had in the erstwhile company either as a member or a
creditor, and if this is not so, such member or creditor shall be
entitled to compensation which is to be assessed by such authority
as may be prescribed. Unless an order of compensation is first
made under sub-section (3), and an appeal therefrom has either
not been filed or has been disposed of, no order of amalgamation
can be made. Another condition precedent is an inbuilt provision
for natural justice, namely, that a proposed draft order has first
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been sent to each of the companies concerned. The companies
may then send suggestions or objections to the Central
Government, which the Central Government must first consider
before passing the final order. Such objections and suggestions
can also be sent from any class of shareholders of either of the
companies, or from any creditors or class of creditors of either of
the companies. [Paras 34, 36] [74-C-D; 75-C-F]
4. "WHERE THE CENTRAL GOVERNMENT IS
SATISFIED": The Central Government's satisfaction must be
as to the conditions precedent mentioned in the Section as
correctly understood in law, and must be based on facts that have
been gathered by the Central Government to show that the
conditions precedent exist when the order of the Central
Government is made. [Para 42] [87-C-D]
Barium Chemicals Ltd. v. Company Law Board
[1967] 1 SCR 898 ; Rohtas Industries Ltd. v. S.D.
Agarwal [1969] 3 SCR 108 ; Western U.P. Electric
Power & Supply Co. Ltd. v. State of U.P. and Anr. (1969)
1 SCC 817 : [1969] 3 SCR 865 ; Rampur Distillery Co.
Ltd. v. Company Law Board [1970] 2 SCR 177 ;
M .A. Rasheed and Ors. v. State of Kerala [1975] 2
SCR 93 ; Khudiram Das v. State of West Bengal (1975)
2 SCC 81 : [1975] 2 SCR 832 ; Tata Cellular v. Union
of India (1994) 6 SCC 651 : [1994] 2 Suppl. SCR
122; Bhikhubhai Vithlabhai Patel v. State of Gujarat
(2008) 4 SCC 144 ; M. Jhangir Bhatusha and Ors. v.
Union of India and Ors. (1989) 2 Suppl. SCC 201 :
[1989] 3 SCR 356 - referred to.
Haryana Financial Corporation v. Jagdamba Oil Mills
(2002) 3 SCC 496 : [2002] 1 SCR 621 - cited.
5. "ESSENTIAL": The Central Government's mind has to
be applied to whether a compulsory amalgamation u/s 396 is
indispensably necessary, important in the highest degree, and
whether such amalgamation is both basic and necessary.
[Para 44] [88-B]
J. Jayalalitha v. Union of India (1999) 5 SCC 138 :
[1999] 3 SCR 653 - referred to.
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P. Ramanath Aiyer's Law Lexicon (4th Edn.);
Black's Law Dictionary (10th Edn.) - referred to.
6.1 "PUBLIC INTEREST": The third pre-requisite of
Section 396 is that the Central Government must apply its mind
when compulsorily amalgamating two or more companies in the
public interest. "Public interest" is an expression which is wide
and amorphous and takes colour from the context in which it is
used. Public interest is the general interest of the community, as
distinguished from the private interest of an individual. "Public
interest" in the context of compulsory amalgamation of two or
more companies would mean the combining of resources of two
or more companies so as to impact production and consumption
of goods and services and employment of persons relatable
thereto for the general benefit of the community.
[Paras 45, 54] [88-C; 94-D-E]
State of Bihar v. Maharajadhiraja Sir Kameshwar Singh
of Darbhanga and Ors. [1952] 1 SCR 889;
Manimegalai v. Special Tehsildar (Land Acquisition
Officer) Adi Dravidar Welfare (2018) 13 SCC 491:
[2018] 3 SCR 1086; Rameshwar Prasad and Ors. v.
State of U.P. and Ors. (1983) 2 SCC 195 : [1983] 2
SCR 418; Janata Dal v. H.S. Chowdhary and Ors.
(1992) 4 SCC 305:[1992] 1 Suppl. SCR 226; Municipal
Corporation of the City of Ahmedabad and Ors. v. Jan
Mohd. Usmanbhai and Anr. (1986) 3 SCC 20 : [1986]
2 SCR 700; B.P. Sharma v. Union of India and Ors.
(2003) 7 SCC 309: [2003] 2 Suppl. SCR 684;
Hindustan Lever Employees' Union v. Hindustan Lever
Ltd. and Ors. (1995) 1 Suppl. SCC 499 : [1994] 4 Suppl.
SCR 723 ; Bihar Public Service Commission v. Saiyed
Hussain Abbas Rizwi and Anr. (2012) 13 SCC 61; R.R.
Tripathi v. Union of India (2010) 1 Bom CR 513 -
relied on.
6.2 Applicability of Section 396 to the facts of the instant
case. Neither FTIL nor NSEL has denied the fact that paired
contracts in commodities were going on, and by April to July,
2013, 99% (and excluding E-series contracts), at least 46% of
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the turnover of NSEL was made up of such paired contracts. There
is no doubt that such paired contracts were, in fact, financing
transactions which were distinct from sale and purchase
transactions in commodities and were, thus, in breach of both
the exemptions granted to NSEL, and the FCRA. NSEL
throughout kept representing that it was, in fact, a commodity
exchange dealing with spot deliveries. Apart from the Grant
Thornton report and the FMC order, Shri Jignesh Shah, on
10.07.2013, made representations to the DCA and the FMC, in
which he stated that NSEL had full stock as collateral; 10-20% of
open position as margin money; and that the stock currently held
in NSEL's 120 warehouses was valued at INR 6000 crore, all of
which turned out to be incorrect. Further, there is no doubt
whatsoever that in July, 2013, as a result of NSEL stopping trading
on its exchange, a payment crisis of approximately INR 5600
crore arose. The further question that remains is whether, given
these facts, the conditions precedent for the applicability of
Section 396 were followed. When it comes to whether the Central
Government's satisfaction as to whether it was "essential" to
amalgamate the two companies, what must be borne in mind is
that NSEL had itself offered a settlement scheme to pay back the
persons who have allegedly been duped. It was found that this
scheme could not really take off, as a result of which,
large amounts continued to be owed to such persons.
[Paras 55 and 55.3, 56] [94-F; 105-C-G]
6.3 The raison d'être for applying Section 396 of the
Companies Act has, by the passage of time, itself disappeared.
In fact, as on today, decrees/awards worth INR 3365 crore have
been obtained against the defaulters, with INR 835.88 crore
crystallised by the committee set up by the High Court, pending
acceptance by the High Court, even without using the financial
resources of FTIL as an amalgamated company. What was
emergent, and therefore, essential, even according to the FMC
and the Government in 2013-2014, has been largely redressed
in 2016, by the time the amalgamation order was made. Also, the
Central Government order does not apply its mind to the
essentiality aspect of Section 396 at all. In fact, in several places,
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it refers to "essential public interest" as if "essential" goes with
"public interest" instead of being a separate and distinct condition
precedent to the exercise of power under Section 396. On facts,
therefore, it is clear that the essentiality test, which is the
condition precedent to the applicable to Section 396, cannot be
said to have been satisfied. [Para 56.2] [112-F-H; 113-A]
6.4 When it comes to "public interest" as opposed to the
"private interest" of investors/traders, who have not been paid,
the amalgamation order dated 12.02.2016 makes interesting
reading. It will be seen that all the expressions used in relation
to "public interest" have relation only to the businesses of the
two companies that are sought to be amalgamated. There is no
interest of the general public as opposed to the businesses of
the two companies that are referred to. The leveraging of
combined assets, capital, and reserves is only to settle liabilities
of certain stakeholders and creditors when the order is read as a
whole, and given the fact that the businesses of the two companies
were completely different. So far as achieving economy of scale
and efficient administration is concerned, it is difficult to see how
this would apply to the fact situation in this case where NSEL is
admittedly a company which has stopped functioning as a
commodities exchange at least with effect from July, 2013 with
no hope of any revival. The sole object of the amalgamation order
is really only to effect speedy recovery of dues of INR 5600 crore,
which has been referred to in the letter of the FMC to the
Secretary, Ministry of Corporate Affairs, dated 18.08.2014.
[Para 59] [114-E; 115-B-E]
7.1 The "recommendations of the FMC are in the form of
a letter dated 18.08.2014, in which the "business reality" is the
fact that dues of INR 5600 crore have to be paid, and that NSEL
does not have the wherewithal to do so. Thus, its parent
company's financial resources ought to be used to effect such
payment. This "business reality", therefore, speaks only of the
private interest of the investors/traders who have been allegedly
duped (which fact will only be established in suits filed by them in
2014), and nothing beyond (which would show some vestige of
public interest). Equally, the grave shattering of public confidence
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and purpose of establishing commodity exchanges having been
defeated, according to the Central Government, is a gloss on the
FMC order dated 17.12.2013. If this were so, one would have
expected a resuscitation or revival of the commodities exchange
of NSEL, which could have been achieved by takeover of its
management. It is difficult to imagine that grave shattering of
public confidence by the permanent shutting down of the
commodities exchange of the NSEL would be remedied only by
facilitating the paying of dues to certain allegedly duped investors/
traders, which fact will be proved or disproved in suits filed by
them which are pending adjudication in the Bombay High Court.
In any case, this reason is wholly irrelevant as an answer to the
objection raised by FTIL which is an objection stating that the
Section applies to Government companies alone. Also, had FTIL
made no such objection, no such answer would have been
forthcoming. It is admitted in the order itself that there is no
"adjudication" on the "fraud" in the facts of this case, and thus,
not an exercise of lifting of the corporate veil of the preamalgamation companies. The amalgamation order contradicts
itself by then stating that NSEL is the alter ego of FTIL, and
thus, the two companies are practically one entity. In any event,
these paragraphs do not indicate as to how the 'alter ego'
argument impacts public interest. [Para 59.3] [118-F-H;
119-A-F]
7.2 Under Section 396(4)(b), the Central Government may,
after considering suggestions and objections from the
stakeholders mentioned, make modifications in the draft order
as may seem to it desirable in the light of such suggestions and
objections. No modification has been made in the body of the
Central Government order as finally made. If the Central
Government had actually considered that each of these three
reasons impact public interest, it would have explicitly said so
after suggestions and objections were made by the various
stakeholders. [Para 59.4] [119-G-H; 120-A]
Ganesh Bank of Kurundwad Ltd. v. Union of India
(2006) 10 SCC 645 : [2006] 5 Suppl. SCR 437 -
distinguished.
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Mohinder Singh Gill v. Chief Election Commissioner
(1978) 1 SCC 405 : [1978] 2 SCR 272; Chairman, All
India Railway Recruitment Board and Anr. v. K. Shyam
Kumar and Ors. (2010) 6 SCC 614 ; PRP Exports and
Ors. v. Chief Secretary, Government of Tamil Nadu and
Ors. (2014) 13 SCC 692 - referred to.
8. Section 396(3) speaks of a shareholder's or a creditor's
interest in or rights against the company resulting from an
amalgamation order. A shareholder or creditor gets effected by
an amalgamation order if the value of his share gets depleted as
a result of the amalgamation and if dividends that have been paid
to him are likely to come down as a result of the amalgamation.
Likewise, a creditor of a solvent company is directly effected by
an amalgamation by which the amount loaned by such creditor
becomes, as a result of the amalgamation, less likely to be paid
back in time, than if the amalgamation did not take place. Such
rights and interests of members and creditors are substantive
rights which, when effected by the amalgamation, lead to
compensation having to be paid. Every shareholder of a company
and indeed, every creditor of a company, is concerned only with
the "economic value" of his share or the loan granted to a company,
as the case may be. The moment the share value, in real terms,
is likely to dip, and/or loans granted are likely not to be repaid in
time or at all as a result of an amalgamation, such members or
creditors of the amalgamating company are equally entitled to be
compensated for this economic loss as are the members and
creditors of the amalgamated company, depending on the facts of
each case. To the extent to which the interest or rights of such
member or creditor are less than his interest or rights against
the original company, post amalgamation, he shall be entitled to
compensation which is to be assessed. [Paras 65, 66] [126-G-H;
127-A-C, E]
Bacha F. Guzdar v. Commissioner of Income Tax
[1955] 1 SCR 876 ; Life Insurance Corporation of India
v. Escorts Ltd. and Ors. (1986) 1 SCC 264 : [1985] 3
Suppl. SCR 909; Commissioner of Income Tax (Central)
Calcutta v. Standard Vacuum Oil Co.
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[1966] 2 SCR 367 ; Miheer H. Mafatlal v. Mafatlal
Industries Ltd. (1997) 1 SCC 579 : [1996] 6 Suppl.
SCR 1 - referred to.
9.1 Government order dated 12.02.2016 itself reflects the
net worth of NSEL as INR 8.86 crore from its balance sheet dated
31.03.2015, despite its capital being INR 60 crore, inasmuch as
the total reserve and surplus is a negative figure of INR 51.54
crore. As against this, FTIL's balance sheet, as on 31.03.2015,
discloses that for the same year, FTIL's net worth is INR 2779.94
crore. Also, FTIL has been paying dividends to its shareholders
ranging from 1000% to 250% for the years 2007-2008 till
2015-2016. On the other hand, NSEL has never paid a single
dividend ever since its inception. Post amalgamation, therefore,
dividend payable to the shareholders of FTIL is bound to come
down. Correspondingly, the 'marketable value' of such shares
will also fall. From the Director's Report and consolidated
financial statements of NSEL, it becomes clear that the company
may be exposed to liabilities in case of any adverse outcome in
any of the proceedings that may be pending, as a result of which,
it may have to pay back the whole or some part of the INR 5600
crore owed to the alleged investors/traders by the 24 defaulters
who are members of NSEL. This would certainly impact the
'economic value' of shares held in FTIL as this is one factor that
would, post amalgamation, depress the market value of shares
held by such shareholder, and would also impact the dividend
payable on such shares post amalgamation. [Paras 72, 73]
[130-E-G; 131-G-H; 132-A-B]
9.2 The impugned judgment has also held that no material
was produced before the Court to show that share prices would
in fact plummet post-amalgamation. This is despite the fact that
the impugned judgment itself refers to the fact that since the
publication of the draft order on 21.10.2014, the share value which
was INR 211.10, dropped to INR 174.55 ten days later. It is well
known that the stock market is extremely sensitive to the
slightest event that may render a company less profitable. It is
obvious that the publication of the draft order on 21.10.2014 had
the impact of the share price reducing by a substantial amount,
ten days later. The moment the final amalgamation order dated
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12.02.2016 was publicised, the share price fell from INR 89.90
on 12.02.2016 to INR 73.90 on 24.02.2016 and further to INR
73.10 on 29.02.2016. Given the fact that the assessment order
dated 01.04.2015 did not provide any compensation to either the
shareholders or creditors of FTIL for the economic loss caused
by the amalgamation in breach of Section 396(3), it is clear that
an important condition precedent to the passing of the final
amalgamation order was not met. On this ground also, therefore,
the final amalgamation order has to be held to be ultra vires
Section 396 of the Companies Act, and, being arbitrary and
unreasonable, violative of Article 14 of the Constitution of India.
[Para 74] [132-C-E, H; 133-A]
9.3 The language used in the appeal provision, i.e. Section
396(3A), is "any person aggrieved by any assessment of
compensation made by the prescribed authority under
sub-section (3) may...... appeal to the Tribunal, and thereupon
the assessment of the compensation shall be made by the
Tribunal." The pre-requisites for the application of sub-section
(3A) are that a person first be aggrieved by an "assessment of
compensation" "made" by the prescribed authority. Where no
assessment of compensation whatsoever is made by the
prescribed authority (and on the facts here, the prescribed
authority has not, in fact, stated that for the reasons given by it,
compensation awarded to FTIL, its shareholders and creditors
is nil), no person can be aggrieved by an order which does not
assess any compensation, which may be interfered with by the
Appellate Tribunal which must then assess the compensation for
itself. [Para 75] [133-B-E]
Institute of Chartered Accountants of India v. L.K. Ratna
and Ors. [1986] 3 SCR 1049 ; Union Carbide
Corporation v. Union of India [1991] 1 Suppl. SCR
251 ; Charan Lal Sahu v. Union of India (1990) 1 SCC
613 : [1989] 2 Suppl. SCR 597 - referred to.
Union of India v. G. Ganayutham (1997) 7 SCC 463 :
[1997] 3 Suppl. SCR 549; Om Kumar v. Union of India
(2001) 2 SCC 386 - cited.
Leary v. National Union of Vehicle Builders
[1971] Ch. 34 - referred to.
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 Case Law Reference
[2006] 5 Suppl. SCR 437
distinguished
Para 16
[1978] 2 SCR 272
referred to
Para 16
[1988] 1 SCR 188
relied on
Para 16
[1969] 2 SCR 866
held inapplicable
Para 16
[1955] 1 SCR 876
referred to
Para 18
[1997] 3 Suppl. SCR 549
cited
Para 18
[2000] 4 Suppl. SCR 693
cited
Para 18
[1967] 1 SCR 898
referred to
Para 19
[1969] 3 SCR 108
referred to
Para 19
[2002] 1 SCR 621
cited
Para 19
[1983] 3 SCR 536
relied on
Para 23
[1970] 2 SCR 10
relied on
Para 23
[1978] 3 SCR 293
partly applicable
Para 25
(1987) 2 SCC 720
relied on
Para 27
[1996] 3 SCR 322
held inapplicable
Para 30
[2000] 2 Suppl. SCR 211
held inapplicable
Para 31
[1959] 1 Suppl. SCR 274
relied on
Para 33
[1960] 2 SCR 671
relied on
Para 33
[1962] 3 SCR 842
relied on
Para 33
[1981] 2 SCR 79
relied on
Para 33
[1987] 1 SCR 819
relied on
Para 33
[1969] 3 SCR 865
referred to
 Para 38
[1970] 2 SCR 177
referred to
 Para 39
[1975] 2 SCR 93
referred to
 Para 39
[1975] 2 SCR 832
referred to
 Para 39
[1994] 2 Suppl. SCR 122
referred to
 Para 39
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[2008] 4 SCC 144
referred to
Para 40
[1989] 3 SCR 356
referred to
Para 41
[1999] 3 SCR 653
referred to
Para 44
[1952] 1 SCR 889
relied on
Para 45
[2018] 13 SCC 491
relied on
Para 46
[1983] 2 SCR 418
relied on
Para 47
[1992] 1 Suppl. SCR 226
relied on
Para 48
[1986] 2 SCR 700
relied on
Para 49
[2003] 2 Suppl. SCR 684
relied on
Para 50
[1994] 4 Suppl. SCR 723
relied on
Para 51
(2012) 13 SCC 61
relied on
Para 52
(2010) 1 Bom CR 513
relied on
Para 53
[2010] 6 SCC 614
referred to
Para 64
[2014] 13 SCC 692
referred to
Para 64
[1985] 3 Suppl. SCR 909
referred to
Para 69
[1966] 2 SCR 367
referred to
Para 70
[1996] 6 Suppl. SCR 1
referred to
Para 71
[1986] 3 SCR 1049
referred to
Para 75
[1991] 1 Suppl. SCR 251
referred to
Para 75
[1989] 2 Suppl. SCR 597
referred to
Para 75
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 4476
of 2019
From the Judgment and Order dated 04.12.2017 of the Division
Bench of High Court of Judicature at Bombay in Writ Petition No. 2743
of 2014
With
Civil Appeal Nos.4478 of 2019, 4477 of 2019, 4479 of 2019, 4481
of 2019, 4480 of 2019 and Writ Petition (Civil) No. 368 of 2019
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Tushar Mehta, SG, Ms. Pinky Anand, ASG, Mukul Rohatgi, A.M.
Singhvi, R. Balasubramanian, Neeraj Kishan Kaul and Arvind P. Datar,
Sr. Advs., Mahesh Agarwal, Ankur Saigal, Ms. Misha Rohatgi,
Ms. Shaneen Parikh, Ms. Namita Shetty, Himanshu Satija, Ms. Tanvi
Manchanda, Ms. Priyanka Vora, E. C. Agrawala, Aviskar Singhvi,
Himanshu Satija, Ms. Tanvi Manchanda, Arvind Lakhawat,
Harshwardhan Reddy, Amit Agrawal, Ms. Diksha Rai, Ms. Palak
Mahajan, Ishan Bisht, Nakul Mohta, Ardhendumauli Kumar Prasad,
Saurabh Kirpal, Rahul G. Tanwani, V.C. Shukla, VNL Sindura, Nikhil
Goel, Arvind Lakhawat, Ms. Ranjeeta Rohatgi, Vikas Mehta,
Varun Singh, Ms. Anushree Menon, Ms. Nupur Desai, Ms. Samiksha
Godiyal, Ms. Sanam Tripathi, Shekhar Vyas, Rajesh Ranjan, Ms. Pratima
Gupta, Anup Dawan, Joel, Ms. Snidha Mehra, Sumit Teterwal, Chakitan
Vikram Shekher Papta, Ms. Kirti Dua, Ms. Saudamini Sharma, Hemant
Arya, Ms. Tanisha Samanta, Anmol Chandan, Ms. Shraddha Deshmukh,
Sai Krishna, A.K. Sharma, D.N. Ray, Chirag Manubhai Shah,
Ms. Sanjana Saddy, Lokesh K. Choudhary, Dillip Kumar Nayak,
Ms. Disha Ray, Sanjay Lodha, Devanshu Sajlan, Mrs. Sumita Ray, Pratap
Venugopal, Ms. Surekha Raman, Ms. Viddusshi, Akhil A. Roy, M/s K.J.
John & Co., Mukesh Kumar Maroria, Advs. for the appearing parties.
The Judgment of the Court was delivered by
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
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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.