In Black's Law Dictionary, Public Interest is defined as Something in which the public, the community at large, has some pecuniary interest, or some interest by which their legal rights or liabilities are affected. It does not mean anything so narrow as mere curiosity, or as the interests of the particular localities, which may be affected by the matters in question. As far as our Companies Act, 2013 (Act) is concerned, it has received statutory recognition in sections 62(4), 129, 210,221, 233(5) and 237 in the Act. The Company law recognizes the fact that interest of public policy shall be given precedence despite the approval of the management and stakeholders.

1. Setting Aside Merger Order In Public Interest

Case :- 63 Moons Technologies Ltd. (formerly known as Financial Technologies India Ltd.) vs. Union of India & Ors. Civil Appeal No. 4476 OF 2019

Background
National Spot Exchange Ltd (NSEL), then 99.99% subsidiary of Financial Technologies India Ltd (FTIL) had shut down its operation after payment default and was ordered not to enter into any fresh contracts by Forward Market Commission which has been integrated into the Securities and Exchange Board of India (SEBI). After the crisis, the Ministry of Corporate Affairs (MCA) on February 12, 2016 had directed merger of two entities National Spot Exchange Ltd. (NSEL) and 63 moons technologies Ltd. (formerly known as Financial Technologies India Ltd.) (Company) exercising the power conferred by Section 396 of erstwhile Companies Act, 1956. The order of MCA was challenged by the Company which was dismissed by the Bombay High Court. The Company challenged the order of the Bombay High Court in Supreme Court. The Apex Court provided its judgment on April 30, 2019.

The extract of Sec. 396 is as under:- (Emphasis provided)

396. Power of Central Government to provide for amalgamation of companies in public interest-

1. Where the Central Government is satisfied that it is essential in the public interest that two or more companies should amalgamate, then, notwithstanding anything contained in Sections 394 and 395 but subject to the provisions of this section, the Central Government may, by order notified in the Official Gazette, provide for the amalgamation of those companies into a single company with such constitution; with such property, powers, (4) No order shall be made under this section, unless:

(a) a copy of the proposed order has been sent in draft to each of the companies concerned; (aa) the time for preferring an appeal under sub-section (3A) has expired, or where any such appeal has been preferred, the appeal has been finally disposed of; and

(b) the Central Government has considered, and made such modifications, if any, in the draft order as may seem to it desirable in the light of any suggestions and objections which may be received by it from any such company within such period as the Central Government may fix in that behalf, not being less than two months from the date on which the copy aforesaid is received by that company, or from any class of shareholders therein, or from any creditors or any class of creditors thereof.

Observation by Apex Court

1. The conditions precedent to pass an order by the Central Government under Section 396 of the Companies Act, 1956 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.
   
2. The 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. However, like the expression public purpose, what is important to be noted is that public interest is the general interest of the community, as distinguished from the private interest of an individual.
   
3. The Central Government order does not apply its mind to the essentiality aspect of Section 396 at all. In fact, in several places, 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.
   
4. 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.

Comment

• The Apex Court in its judgement1 had observed that In particular, it is urged that where the rules are of a general nature and are subordinate legislation the satisfaction of the condition precedent becomes a part of the legislative process so far as the subordinate authority is concerned... Additionally the Apex Court took a view that There is no doubt that where a statute requires that certain delegated power may be exercised on fulfilment of certain conditions precedent, it is most desirable that the exercise should be prefaced with a recital showing that the condition had been fulfilled. But it has been held in a number of cases dealing with executive orders that even if there is some lacuna of this kind, the order does not become ab initio invalid and the defect can be made good by filing an affidavit later on to show that the condition precedent was satisfied.
  
• It shall be further noted that, the principle of interpretation of the provision shall be construed according to the intent for which it is made. If the language employed in the legislation is clear and plain the same must be given effect to however if the provision are not precise or variable the rule of strict grammatical interpretation shall cease to understand the real legislative intent.
  
• Additionally, the concept of Public Interest in relation to Company would take the Company outside the realms of being concerned only in relation to shareholders. The High Court of Orissa2 in its supra further stated.... It emphasises the idea of the company functioning for the public good or general welfare of the community at any rate not in a manner detrimental to the public good.

2. Rejection of Scheme of Amalgamation In Public Interest

Case: Wiki Kids Ltd.(Appellant 1) and Avantel Ltd. (Appellant 2) v. Regional Director, South East Region and Others Company Appeal (AT) No.285 of 2017

Facts of Wiki Kids Ltd and Avantel Ltd. v/s. Regional Director, South East Region

• The Appeal was preferred by Appellant 1 and Appellant 2 against the order of NCLT, Hyderabad wherein the scheme of amalgamation was rejected by Tribunal.
  
• Appellant 1 (Unlisted Company) and Appellant 2 (Listed Company) was controlled by common promoters. The rationale of the scheme of amalgamation was that is that Amalgamation will enable Appellant 2 to diversity into high growth and profitable areas of business without any gestation. The Appellants had obtained consent from shareholders and creditors. The share exchange ratio has been computed by an expert independent chartered accountant in accordance with the settled principles of valuation and law.
  
• The Appellant cited judgements3 wherein it was held that the company court’s jurisdiction to that extent is peripheral and supervisory and not appellate. Further, the Appellant placed reliance on judgement4 wherein it was observed that the basic principle of such satisfaction is none other than the broad and general principles inherent in any compromise or settlement entered between parties that it should not be unfair or contrary to public policy or unconscionable.

Synopsis of Judgement

• The Tribunal observed that, the Appellant 1 is not commence its commercial production/operation, whereas the rationale of the scheme states improved cash flows, increased net worth, better credit rating, strengthening the value of all the stakeholders, optimising and ever growing existing resources and infrastructure of Appellant 2.
  
• Pursuant to the share exchange ratio the shares allotted to the shareholders of Appellant 1 are nothing but common promoters and the financial benefit is only flowing to few common promoters and public interest is not being served as envisaged in the scheme. Further it was observed that, the scheme of amalgamation did not have list of shareholders, name of directors of both companies and disclosure of shares allocated to common promoters in absence of vital information stakeholders would not take a well informed decision whether to approve or reject scheme.
  
• The Tribunal buttress on the observation of the Valuation Report wherein it was observed that Appellant 1 did not prepare profit and loss account till financial year 2015-16 as the Appellant 1 was developing an e-platform and ready for commercial launch. It is clear that Appellant 1 did not generate revenue till the said financial year.

Questions under consideration

• Despite of reported judgements in relation to role of Courts in amalgamation can scheme be rejected by Tribunal?

Comments

• It shall be noted that every judgment is distinguished basis the facts of the case. In a case if it is evident that the scheme is not fair and evasive it would be prudent to consider the case on standalone basis. Further, NCLT, Mumbai in its order5 had rejected the Scheme of arrangement citing the scheme designed purely scheme appears to be framed also for the purpose of evading the duly payable stamp-duty and to deny the shareholders at various levels their legitimate right of a proper valuation of the intrinsic share value along with goodwill. It was further observed by the Tribunal that the scheme is unfair and unreasonable and is in violation of many provisions of various laws and does not even stands to logic and further contrary to Public Interest.

Conclusion
To conclude Public interest has very wide expression and comprehends that there should be economic welfare of the community at large. In this regard, Indian law enjoins the duty on the judiciary to examine objectively and carefully if any arrangements are not violative of public interest.

Case Laws:

1. The Swadeshi Cotton Mills Co. vs The State Of U. P. And Others (on 17 March, 1961) 1961 AIR 1381, 1962 SCR (1) 422
2. N.R.Murty vs Industrial Development Corporation Of Orissa Ltd. And Others on 7 January, 1977
3. Miheer H Mafatlal v. Mafatlal Industries Ltd. [1996] 23 CLA 1 (SC)/[1997] 1 SCC 579
4. Hindustan Lever Employees Union v. Hindustan Lever Ltd. [1994] 15 CLA 318 (SC)/[1995] Supp (1) SCC 499
5. UFO Moviez India Limited and PJSA Technosoft Private Limited C.P. (CAA)/1920/MB/2018 order dated 12th February, 2019.