2002 (4) TMI 827 - HC - Companies Law

Summary

Issues involved:

1. Jurisdiction of the Court under Section 391 of the Companies Act, 1956.
2. Classification of creditors for the purpose of voting on the scheme.
3. Validity and fairness of the scheme of arrangement.
4. Allegations of fraud and mismanagement.
5. Public and commercial morality of the scheme.
6. Impact of pending legal proceedings on the scheme.
7. Approval of the scheme by the requisite majority.

Detailed Analysis:

1. Jurisdiction of the Court under Section 391 of the Companies Act, 1956:

The objectors argued that the company, being a 'Relief Undertaking' under the Bombay Relief Undertaking Act, could not invoke the jurisdiction of the Court under Section 391. The Court held that there was no express or implied bar under the BRU Act to a petition under Section 391. The Court noted that the protection under Section 391(6) of the Companies Act would follow once the scheme is examined and approved, and the company could pursue proceedings under Section 391 even during the subsistence of the notification under the BRU Act.

2. Classification of creditors for the purpose of voting on the scheme:

The objectors contended that foreign currency lenders should have been constituted as a separate class of secured creditors. The Court found that all secured creditors, whether lending in foreign or Indian currency, had been treated alike and no distinction was made. The Court referred to various judgments to conclude that classification of creditors should be based on the terms offered under the scheme. Since the same terms were offered to all secured creditors, the foreign currency lenders did not constitute a separate class.

3. Validity and fairness of the scheme of arrangement:

The scheme was supported by the requisite majority of creditors. The Court noted that the statutory requirements under Section 391(2) were met, as the scheme was approved by 85.36% in number and 88.68% in value of the secured creditors present and voting. The Court emphasized that the scheme was floated and supported by the creditors themselves, indicating it was fair and reasonable.

4. Allegations of fraud and mismanagement:

The objectors alleged that the scheme sought to legitimize fraudulent transactions, including sale and leaseback transactions and the spin-off of the garment division. The Court found no evidence of fraud or mismanagement. It noted that the transactions were scrutinized by a Sub Committee and approved by the Steering Committee and GBIFR. The Court held that the scheme did not operate as a cloak to cover up any fraud and was not intended to shield the directors from any investigation.

5. Public and commercial morality of the scheme:

The objectors argued that the scheme offended public and commercial morality as it did not provide for the payment of dues to the State Government. The Court found that the scheme excluded the State Government's dues to avoid requiring sacrifice from the State Government. The Court emphasized the larger public interest, noting that the scheme would benefit over 10,000 employees and their families, and indirectly support many others. The Court concluded that the scheme was not against public or commercial morality.

6. Impact of pending legal proceedings on the scheme:

The objectors contended that the scheme would negate their legal remedies in pending proceedings in the English Court. The Court held that the pendency of the suit could not come in the way of considering the scheme, as the scheme aimed to protect the interests of the majority of creditors and put the company on sound financial footing. The Court clarified that the sanction of the scheme would be subject to the outcome of the pending legal proceedings.

7. Approval of the scheme by the requisite majority:

The objectors argued that the scheme was not approved by the requisite majority as required under Section 391(2). The Court found that the scheme was approved by the requisite majority of secured creditors, with 85.36% in number and 88.68% in value voting in favor. The Court dismissed the objections regarding the invalidity of certain votes, noting that conditional votes could not be counted.

Conclusion:

The Court sanctioned the scheme of compromise and arrangement for restructuring the debts of the company, subject to the outcome of pending civil and criminal proceedings. The Court emphasized that the scheme was fair, reasonable, and in the larger public interest, benefiting the company, its creditors, and its employees.