2006 (12) TMI 221 - HC - Companies Law

Issues Involved:
1. Sanction of the scheme of compromise under section 391(2) of the Companies Act, 1956.
2. Validity of the meeting of secured creditors.
3. Objections raised by secured creditors, particularly Indusind Bank Ltd. and Mashreq Bank.
4. Jurisdiction of the High Court vis-`a-vis the BIFR proceedings.
5. Fairness and equity of the proposed scheme to all secured creditors.

Detailed Analysis:

1. Sanction of the Scheme of Compromise:
The petitioner-company, Modern Syntex (India) Ltd., sought the sanction of a scheme of compromise under section 391(2) of the Companies Act, 1956, to be binding on all its secured creditors. The company, part of the Modern Group, faced significant financial difficulties due to global recession, stiff competition in the textile industry, and the Gujarat earthquake in 2001. This led to substantial losses and the need for rescheduling and restructuring of its debts. The scheme was approved by the Board of Directors on 18-7-2005 and was subsequently approved by a majority of secured creditors in a meeting convened on 20-9-2005.

2. Validity of the Meeting of Secured Creditors:
The meeting of secured creditors was convened following the court's order, and notices were published in newspapers. The scheme was approved by 18 out of 25 secured creditors, representing 77.27% in value of the total debts. However, objections were raised regarding the conduct of the meeting, including the sealing of ballot boxes and the counting of ballots. Despite these objections, it was found that the voting was evaluated by independent scrutinizers, and there were no errors in the counting process.

3. Objections Raised by Secured Creditors:
Indusind Bank Ltd. and Mashreq Bank raised several objections:
- Indusind Bank Ltd.: Claimed that the notice convening the meeting did not allow creditors to voice objections and that the ballot papers did not mention the value of individual votes. They also argued that the scheme was oppressive and involved excessive sacrifices, particularly highlighting the significant financial loss they would incur under the proposed options.
- Mashreq Bank: Echoed similar objections and emphasized that the scheme would harshly affect their interests. They also pointed out that the scheme envisaged the discharge of personal guarantees given by the company's directors, which they argued was a misstatement.

4. Jurisdiction of the High Court vis-`a-vis BIFR Proceedings:
The objectors argued that since the petitioner-company was registered with the BIFR and declared a Sick Industrial Company, the High Court should not exercise its discretion to sanction the scheme. However, it was contended that section 22 of the SICA does not bar proceedings under section 391 of the Companies Act. Various judicial pronouncements were cited to support this view, indicating that the provisions of SICA and the Companies Act operate in different spheres and are not inconsistent with each other.

5. Fairness and Equity of the Proposed Scheme:
The court examined whether the scheme was just, fair, and equitable to all secured creditors. It was noted that the scheme involved significant sacrifices for minority creditors like Indusind Bank, which would receive substantially less than their outstanding amounts under the proposed options. The court found that such high sacrifices were oppressive and unreasonable, even from the perspective of a prudent person.

Conclusion:
The court concluded that the proposed scheme was not just, fair, and equitable to all secured creditors, particularly the minority creditors who would bear excessive sacrifices. Additionally, given the BIFR's involvement and the pending winding-up petitions, the court found no merit in interfering under section 391 of the Companies Act. Consequently, the petition for sanctioning the scheme was dismissed without any order as to costs.

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