2007 (12) TMI 281 - HC - Companies Law

Compromise and arrangement - Held that - Nowhere Section 80 prohibits conversion of the preference shares into a loan. It is nobody s case that the preference shares shall be redeemed on repayment of term loan No. 1. Indeed learned counsel for the petitioner submits that preference shares are not being redeemed but are being converted into FITL and the term loan availed by the company shall stand waived on repayment of term loan No. 1. He also submits that preference capital is not waived and its nature is changed to a loan. Therefore, the objection of the Central Government cannot be sustained. The condition in the scheme of arrangement was also agreed to by the secured creditors in the meeting convened by the chairperson appointed by this court. Therefore, there cannot be any serious objection nor such clause violates any provision of law. On condition of modifying clause A to chapter B of Part III of the scheme of arrangement that 50 per cent, of the existing equity capital aggregating to ₹ 1,873,591,000 (rupees one thousand eight hundred seventy three million five hundred ninety one thousand only) shall be converted into 0.1 per cent, non-cumulative redeemable preference shares (NCRPS), which shall be redeemed on or before March 31, 2026 and if the company is not able to redeem NCRPS the company will make fresh issue of NCRPS of the equivalent amount to the existing holders of NCRPS the scheme of arrangement as set out in paragraph 12 of the petition in the schedule hereto between M/s. SJK Steel Plant Limited, its secured creditors and equity and preference shareholders is hereby sanctioned.

Issues Involved:
1. Sanction of the Scheme of Compromise/Arrangement
2. Objections by the Central Government
3. Compliance with the Companies Act, 1956

Issue-wise Detailed Analysis:

1. Sanction of the Scheme of Compromise/Arrangement:
The petitioner, M/s. SJK Steel Plant Limited, sought court sanction for a scheme of compromise/arrangement under sections 100, 391, and 392 of the Companies Act, 1956. The scheme was unanimously approved by the equity shareholders, 96.90% of the secured creditors, and 100% of the preference shareholders. The court emphasized that it should approve the scheme unless it contravenes any law or is intended to defeat stakeholder interests through fraud or misrepresentation. The primary objective of the scheme was to make the business financially viable by restructuring term loans, working capital loans, and equity/preferential shares.

2. Objections by the Central Government:
The Central Government raised four objections:

Objection No. 1:
The conversion of preference shares with accumulated dividends into Funded Interest Term Loans (FITL) and their waiver on repayment of term loans was argued to be contrary to section 80(1)(a) of the Act. The court found that section 80 does not prohibit the conversion of preference shares into a loan and dismissed this objection.

Objection No. 2:
The conversion of a term loan into equity shares with a condition for transfer to M/s. Kalyani Steels was argued to restrict the free transferability of shares. The court held that since the petitioner-company is unlisted, there is no bar under the Act for such a condition, and thus, this objection was dismissed.

Objection No. 3:
The scheme's provision for redeeming non-cumulative redeemable preference shares (NCRPS) after the repayment of secured creditors' dues in 2028 was argued to be contrary to section 80(5A) of the Act, which prohibits the issuance of preference shares redeemable after 20 years. The court modified the clause to ensure NCRPS would be redeemed on or before March 31, 2026, or else fresh NCRPS would be issued.

Objection No. 4:
The Central Government contended that M/s. Kalyani Steels and the promoters did not file undertakings to contribute equity capital and additional funds, respectively. The court found that M/s. Kalyani Steels had already extended working capital support, and the promoters had brought in an interest-free unsecured loan of Rs. 18.00 crores. Thus, this objection was also dismissed.

3. Compliance with the Companies Act, 1956:
The court referred to several precedents, including the Supreme Court's decision in Miheer H. Mafatlal v. Mafatlal Industries Ltd., which established that a scheme of arrangement must comply with statutory procedures and should not contravene any provision of law. The court concluded that the scheme, with the modification to clause A of Chapter B of Part III, did not violate any provisions of the Companies Act, 1956, and was not contrary to public policy.

Conclusion:
The court sanctioned the scheme of arrangement, declaring it binding on the company, its equity/preference shareholders, and secured creditors, subject to the modification of clause A of Chapter B of Part III. The petitioner-company was directed to file a certified copy of the order with the Registrar of Companies within thirty days and to pay costs of Rs. 5,000 to the Assistant Solicitor General for the Central Government. The petition was disposed of accordingly.

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