2005 (1) TMI 407 - HC - Companies Law

Summary

Issues Involved:
1. Procedural lapses in convening and conducting creditor meetings.
2. Violation of various statutory provisions.
3. Illegality and irregularity in the scheme.
4. Mala fide intentions and overall fairness of the scheme.

Detailed Analysis:

1. Procedural lapses in convening and conducting creditor meetings:
The objections raised highlighted that notices for the creditor meetings were not properly served on various creditors, and affidavits of service were not filed by those who dispatched the notices. The petitioner No. 1, who acted as the Chairman of the meetings, was alleged to have a conflict of interest as he was also a creditor and beneficiary under the scheme. Additionally, the explanatory statement under section 393(1)(a) was deemed defective, and the latest balance-sheet was not annexed to the petition nor circulated to the creditors. The proxies were considered invalid, and the figures mentioned in the scheme were incorrect.

2. Violation of various statutory provisions:
The scheme was objected to on the grounds that it violated several statutory provisions, including:
- The failure to call a meeting of the equity shareholders.
- The meeting of statutory creditors could not be convened due to a lack of quorum.
- The scheme's provision for the constitution of the Board of Directors was improper.
- The scheme violated section 293(1)(a) of the Companies Act.
- The scheme could not bind Stock Exchanges or GIDC without their consent.
- The scheme affected the workmen of the company, and their meeting was not convened.

3. Illegality and irregularity in the scheme:
The scheme was alleged to contain several illegalities and irregularities, such as:
- Attempting to terminate proceedings against guarantors, which is impermissible and against public interest.
- Attempting to terminate pending criminal proceedings against petitioner No. 1.
- Attempting to terminate misfeasance proceedings against promoters or directors.
- Collusion between the petitioners and Bank of India.
- The petitioners' inability to pay or fructify the scheme.
- The speculative nature of the scheme.
- Contravention of RBI directives.

4. Mala fide intentions and overall fairness of the scheme:
The scheme was alleged to be mala fide, with the petitioners not serving notice to creditors before moving the application to convene meetings. The cost of the scheme proceedings was also an issue. The objections asserted that the scheme was not just, fair, or reasonable and was intended to dispose of the company's assets and relieve promoters and ex-directors from their personal liabilities. The scheme proposed to issue debentures at a premium, which was considered impractical and unjust. The offer to pay secured creditors 20% of their dues, creditors for goods and expenses 1%, and loan creditors 3% was deemed unfair. The scheme did not address the interests of shareholders or employees and lacked a clear plan for the company's future business operations.

Conclusion:
The court concluded that the scheme was not supported by the requisite statutory majority and did not comply with the necessary statutory and procedural requirements. The scheme was found to be unfair, unreasonable, and not in the public interest. The court refused to sanction the scheme and dismissed the petition with exemplary costs.