India: Double Majority Concept And Arrangements, Amalgamations Etc.

INTRODUCTION

The Principle of Double Majority is an unwritten convention which gained an uncertain vogue in Canada under the Union Act of 18412. This concept refers to attaining an approval by a simple majority where for such approval, special majority is required. The concept of double majority is accepted worldwide and had been used in decision making process under European Union [EU]. Under EU, a voting rule was suggested and evaluated, i.e. the so-called double majority principle, based on two sets of weights in voting3. One of the current suggestions aims at establishing a doublemajority voting system in the Council of the EU-formerly the Council of Ministers-requiring a majority of both member-states and their populations within that institution4. Such a system ensures better and fairer voting for decision making and this is why double majority rules are used in practice5.

EXAMPLES OF ACCEPTANCE OF DOUBLE MAJORITY6

EUROPEAN UNION

In the European Union, double majority voting is a form of Qualified Majority Voting which is to apply to almost all policy areas starting in 2014 under the Treaty of Lisbon. Any decision taken under this scheme will require the support of at least 55% of the Council of the European Union members who must also represent at least 65% of the EU's citizens.

SWITZERLAND

In Switzerland, the passing of a constitutional amendment by initiative requires a double majority; not only must a majority of people vote for the amendment but a majority of cantons must also give their consent. This is to prevent a larger canton from foisting amendments onto the smaller ones and vice versa.

UNITED STATES

Double majority is used in the United States for some initiative or referendum votes on issues such as a tax levy or bond. Essentially, a double majority standard applies a two-part test to a vote outcome before a measure is passed:

1. Did a majority of registered voters turn out for the election? If voter turnout does not surpass this threshold, the measure fails, regardless of the outcome of those who did vote.

2. Did the measure pass with the requisite majority of votes? If so, the measure passes. If not, the measure fails.

This mechanism is used to prevent a small group from passing spending measures that affect the entire population in order to support their pet causes, especially at an election expected to have low voter turnout. Double majorities are also frequently used in municipal annexations, wherein majorities of both the residents in the annexing territory and the territory to be annexed must support the annexation. A similar rule exists for adopting Metro government in Tennessee, where the referendum must pass both inside and outside the principal city.

DOUBLE MAJORITY RULE AND INDIAN COMPANIES ACT, 1956

Chapter V of the Companies Act deals with Arbitration, Compromises, Arrangements and Reconstructions. Section 391(2) of the Companies Act draws reference to the 'double majority rule' where a proposed resolution has to obtain approval of not only more than 50% in number but also approval of 75% by value of votes casted.

Section 391 (2) of the Indian Companies Act, 1956 can be read as follows:

(2) If 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 either in person or, ............................., agree to any compromise or arrangement, the compromise or arrangement shall, if sanctioned by the Court, be binding on all the creditors,..............................

Therefore, the provisions of Section 391 (2) liberalize the consent required for passing a resolution i.e. if the majority is in favor of the resolution and such majority is representing three fourth the value of the stakeholders as provided in the section, the resolution may be passed in such meeting. Meaning thereby, the consent of the particular resolution may not be withheld unnecessarily when it appears to the majority that such resolution is for the benefit of all.

Such a rule where the majority required is in number representing 3/4th in value for passing of resolution may be called as 'double majority rule' as not only the approval of more than 50% in number is required but also approval of 75% by value of votes is to be ensured (of those who are attending and voting). Such an approval is hard to get but it ensures that if such a resolution is passed the interests of minority do not get suppressed because passing of such resolution can result in the reconstruction of the company which is an important issue and concerns to all.

In Miheer H Mafatlal v Mafatlal Industries Ltd.7the issue arose as to why does the sanction of court is required and whether after passing of resolution by double majority the inspection of scheme by court is required when the court only has a supervisory jurisdiction over the matter. The Hon'ble Court held that as per section 394 the court has a duty to look into the scheme and scrutinize it so as to satisfy itself that the scheme is not contrary to public interest. Even after the passing of resolution by the majority in number representing 3/4th in value the scheme should be looked through the eyes of the third party as those who voted for the scheme kept only their interest in mind. The court acts as an independent third party and ensures that the scheme is not unfair or contrary to public policy.

In Re: Siel Limited8, the question was raised that whether 3/4th of the value of the creditors and members had not voted in favor of the scheme and, if so, its effect? – Under Sub-section (2), the Scheme can be sanctioned by the Court only if the majority in numbers of the members or creditors or the class of creditors, as the case may be, representing 3/4th in value of the members or creditors or a class of members or creditors, as the case may be, have agreed to Scheme.9

If the resolution granting approval to the scheme of arrangement is passed by more than 3/4 in value of the creditors but, is not carried by the majority in number of the creditors, the scheme would not be approved by the court.10

The majority in number of the creditors is provided in the section for safeguarding the interests of the large number of small creditors whose voice is often lost amongst small number of big creditors.11

CONCLUSION

Even though interest of majority can be known by ordinary or special resolution12, the interest of majority obtained via Double majority route makes the opinion of those who are voting clearer. The Double Majority concept in Companies Act 1956 serves a significant purpose, thereby, making the job of court easy although the Court has to run a final check even after that ensure whether the scheme is fair. On the other hand, the Court cannot pass the scheme if Double Majority is not attained under Section 392 (1) even if it feels the scheme to be fair and just. Obtaining Double Majority only rules out the possibilities of unfair resolutions passed to oppress the minorities to a large extent. The final check is still done by the Court.

Footnotes

Shivam Hargunani/Intern

2 'Double Majority rule in the History of Canada', available at: http://faculty.marianopolis.edu/c.belanger/quebechistory/encyclopedia/DoubleMajority-HistoryofCanada.htm .

3 Frantisek Turnovec, 'The Double Majority Principle and Decision Making Games in Extending European Union', No 48, East European Series, Institute for Advanced Studies (1997).

4 Madeleine O. Hosli, 'The Balance Between Small and Large effects of a Double-Majority System on Voting Power in the European Union', International Studies Quarterly, Vol. 39, No. 3, Sep., 1995.

5 Gersbach, H. 2005. 'Democratic Mechanisms: Double Majority Rules and Flexible Agenda Costs', CEPR Discussion Paper no. 5013, London, Centre for Economic Policy Research

6 http://en.wikipedia.org/wiki/Double_majority

7 Miheer H Mafatlal v Mafatlal Industries Ltd., JT 1996 (8) 205.

8 In Re: Siel Limited, (2004) 122 CompCas 536 Delhi.

9 ICICI Bank Limited vs Unknown, (2002) 104 BOMLR 399.

10 Kaveri Entertainment Limited vs Unknown, (2003) 117 CompCas 245 Bom.

11 Ibid.

12 Section 189, Companies Act, 1956.

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