2009 (12) TMI 521 - HC - Companies Law

Demerger - Whether the decision reached by the learned single judge that the scheme of arrangement proposed by the petitioner-company cannot be approved since it is in violation of the statutory provisions and prejudicial to the shareholders as well as the secured creditors of the company would be sustainable or not? Held that - On a overall consideration of the facts and circumstances of the case for ascertaining the real purpose of the scheme by piercing the veil of apparent corporate purpose underlying the scheme we are of the considered view that the approval sought for by the petitioner-company for the demerger with its two offspring companies is prejudicial to respondents Nos. 1 to 4 and the said scheme of arrangement is also violative of the provisions of section 391 of the Companies Act sections 100 to 104 of the Act and section 62 of the Indian Contract Act. Therefore the rejection of approval of the scheme of arrangement by the learned single judge is in order and we are unable to see anything to disturb the finding of the learned single judge. Appeal dismissed.

Summary

Issues Involved:
1. Approval of the scheme of arrangement for demerger.
2. Consent and participation of shareholders and creditors.
3. Compliance with statutory provisions under the Companies Act.
4. Potential prejudice to creditors and shareholders.

Issue-wise Detailed Analysis:

1. Approval of the scheme of arrangement for demerger:
The petitioner, G.V. Films Ltd., sought approval for a scheme of arrangement to demerge into two companies, G.V. Studio City Ltd. and G.V. New Media Technologies Ltd. The demerger aimed to enable focused business growth, attract investors, and ensure better operational management. The scheme was approved by the majority of the equity shareholders in a meeting convened under court orders, with modifications duly approved.

2. Consent and participation of shareholders and creditors:
The petitioner argued that the scheme was overwhelmingly approved by the shareholders and consent was obtained from the secured creditors. However, the respondents, including bondholders, contended that they were not properly informed or consulted, and their interests were jeopardized. The court found that the notice for the shareholders' meeting was inadequately published, and the meeting of unsecured creditors was not convened, violating the procedural requirements.

3. Compliance with statutory provisions under the Companies Act:
The court emphasized the necessity of complying with section 391 of the Companies Act, which mandates proper notice and meetings for creditors and shareholders. The petitioner failed to convene a meeting of unsecured creditors, which was crucial given the significant liabilities involved. The court also noted the absence of a specific resolution for the reduction of capital as required under sections 100 to 104 of the Companies Act.

4. Potential prejudice to creditors and shareholders:
The respondents, particularly the bondholders, argued that the demerger would leave the parent company with insufficient assets to meet its obligations, thereby prejudicing their interests. The court agreed, noting the substantial reduction in the petitioner company's capital and assets post-demerger, which would adversely affect the ability to repay creditors. The scheme was found to be detrimental to both shareholders and creditors, including the bondholders who had not opted for conversion into shares.

Conclusion:
The court concluded that the scheme of arrangement for demerger was prejudicial to the creditors and shareholders and violated statutory provisions. The approval of the scheme was rejected, and the appeal was dismissed, confirming the order of the learned single judge. The court emphasized the importance of ensuring that no party is prejudiced by such corporate restructuring and that all statutory requirements are meticulously followed.