2010 (8) TMI 183 - HC - Companies Law

Preparation and sanction of schemes - whether a technical defect should be made to now negate the scheme when various parties have altered their position in terms of the aspect of reduction of shareholding and the consequential acts? Held that - This would be a fruitless exercise and the mere completion of formality as if the plea of the petitioner that dilution of share should not take place was to be accepted, the complete restructuring process would be affected. The company stands revived and various parties have acted in pursuance to the scheme and shares traded. It is not as if there are various options or alternatives put forth by the petitioner, but the whole case of the petitioner is predicated on the plea that its shareholdings should not be diluted without its consent. We have already held that the consent of the petitioner is not required. Thus, no useful purpose would be served as the issue of dilution of shareholding cannot be revisited without affecting the whole scheme which in effect stands implemented and the fruits of which are available and are even being enjoyed by the petitioner in terms of a much higher face value of the share at almost three times of the face value as against less than 10 per cent of the face value. We are, thus, not inclined to re-open this chapter. Appeal dismissed.

Summary

Issues Involved:
1. Power of BIFR to dilute equity under section 18(2)(f) of SICA without following procedures under the Companies Act.
2. Requirement of consent from a public financial institution under section 19(2) of SICA for dilution of equity.
3. Non-compliance with section 18(3)(a) of SICA regarding publication of the draft scheme.

Issue-wise Detailed Analysis:

First Aspect:

The petitioner argued that the BIFR lacked the power to dilute equity under section 18(2)(f) of SICA without adhering to the procedures prescribed under sections 81, 100 to 103 of the Companies Act. The court examined the approved rehabilitation scheme, which included strategies such as One Time Settlement (OTS) of dues, infusion of fresh funds by promoters, and capital restructuring. The scheme involved reducing the equity share capital by 90% and consolidating shares. Section 18(2)(f) of SICA allows the BIFR to reduce shareholders' rights for the company's rehabilitation. Section 32 of SICA gives primacy to its provisions over other laws. The court upheld the BIFR's power to reduce share capital without a special resolution, citing the overriding role of SICA and similar precedents. The AGM, where the scheme was approved, saw participation from all shareholders except the petitioner.

Second Aspect:

The petitioner contended that as a public financial institution, its consent was required under section 19(2) of SICA for any equity dilution. Section 19(1) of SICA specifies that financial assistance for a sick company can include loans, advances, guarantees, reliefs, or concessions. The court found no merit in equating shareholding dilution with financial assistance under section 19(1). The court referred to a similar case from the Madras High Court, which held that equity reduction does not require consent under section 19(2). The court also noted that the petitioner had already diluted its shareholding from 30% to 7.76% and was holding only 1.31% of the equity capital. The court emphasized that the petitioner's investment had become almost worthless due to the company's financial state, but the rehabilitation scheme had increased the share value.

Third Aspect:

The petitioner argued that the draft scheme's publication did not comply with BIFR's direction under section 18(3)(a) of SICA, as it was only published in Jammu & Kashmir Times. The court acknowledged the technical defect but noted that the petitioner had the opportunity to participate in the AGM and did not do so. The court emphasized that the overwhelming majority of shareholders supported the scheme. The court considered the publication in Jammu & Kashmir Times as sufficient compliance with section 18(3)(a), despite the technical defect. The court decided that reopening the issue would be a fruitless exercise, as the restructuring process had already been implemented, benefiting all parties, including the petitioner.

Conclusion:

The court dismissed the writ petition, upholding the BIFR's powers under section 18(2)(f) of SICA, rejecting the need for the petitioner's consent under section 19(2), and considering the publication defect as insufficient to negate the scheme. The court emphasized the successful implementation and benefits of the rehabilitation scheme.