2009 (2) TMI 472 - HC - Companies Law

Scheme of arrangement - Held that - The scheme is not just, fair or proper and the court cannot grant its sanction to such a scheme. It is not bona fide moved by the petitioners. The court further forms an opinion that by proposing the schemes one after another, the petitioners are creating legal hindrances in the way of the official liquidator to proceed with the disposal of the assets of the company in liquidation. As a matter of fact, in the past, auctions were held, offers were invited and accepted, part consideration was received by the official liquidator and it is only by virtue of the scheme proposed, the entire transaction was given a go-bye. The company went into liquidation in 2003 and even in 2009, the assets could not be sold. They have been getting deteriorated day by day. The court, therefore, outrightly refuses to grant its sanction and the resultant effect thereof is that all the three petitions are dismissed. Since the petitions are dismissed and since a statement was made before the court during the course of arguments and even in the petition that earlier application moved for convening the meeting is of no consequence in view of the present scheme, the official liquidator can proceed with the disposal of the assets of the company in liquidation.

Issues Involved:
1. Sanction of the scheme of arrangement.
2. Historical background of the company.
3. Impact on unsecured creditors, equity shareholders, and secured creditors.
4. Preferential claims of the Government.
5. Claims of workers and employees.
6. Official liquidator's expenses.
7. Objections by the Regional Director.
8. Validity of the petition filed by ex-promoters.
9. Fairness and feasibility of the scheme.

Detailed Analysis:

1. Sanction of the Scheme of Arrangement:
The primary issue is whether the court should sanction the scheme of arrangement proposed by the ex-promoters of Mardia Steel Ltd. (in liquidation). The scheme aims to transfer the company's assets to two wholly-owned subsidiaries, Atithi Dwelling P. Ltd. and Karnavati Dwelling P. Ltd. The court must ensure the scheme is fair, just, and reasonable, and that it benefits the creditors and shareholders.

2. Historical Background of the Company:
Mardia Steel Ltd. was established in 1974 and expanded significantly in 1995. However, due to adverse economic conditions, the company faced continuous losses, leading to its reference to the BIFR and eventual winding up in 2003. Several revival attempts failed, and the company's net worth was fully eroded by 1998.

3. Impact on Unsecured Creditors, Equity Shareholders, and Secured Creditors:
Separate meetings were convened for unsecured creditors, equity shareholders, and secured creditors, all of whom unanimously approved the scheme. The unsecured creditors, equity shareholders, and secured creditors voted in favor of the scheme, indicating broad support among these groups.

4. Preferential Claims of the Government:
The official liquidator raised concerns that the scheme does not address the settlement of statutory preferential claims, such as income tax, sales tax, customs, excise, and other government dues. The court noted that the scheme must ensure these liabilities are honored to avoid detrimental impacts on the government's statutory claims.

5. Claims of Workers and Employees:
The official liquidator highlighted that the claims of workers and employees were not invited, and no meeting was convened for this separate class of creditors. The court stressed the importance of addressing these claims and ensuring re-employment opportunities for ex-workers as part of the scheme.

6. Official Liquidator's Expenses:
The official liquidator incurred significant expenses for safeguarding the company's assets and other administrative costs. The court considered the need for the petitioners to deposit funds to cover these expenses, demonstrating their bona fides and ensuring the liquidator's costs are reimbursed.

7. Objections by the Regional Director:
The Regional Director raised several objections, including:
- The official liquidator's role in ascertaining claims and liabilities.
- Uncertainty about re-employment of ex-workers.
- The scheme's silence on additional funds in case of shortfall.
- Concerns about the scheme being a ploy to dispose of the company's properties.

The court scrutinized these objections, emphasizing the need for clear provisions to address these concerns.

8. Validity of the Petition Filed by Ex-Promoters:
The Assistant Solicitor General argued that only the liquidator could file an application for sanctioning the scheme under section 391(1) of the Companies Act, 1956. The court referred to the Supreme Court's decision in Meghal Homes P. Ltd. v. Shree Niwas Girni K. K. Samiti, which clarified that a company under winding up could propose a scheme.

9. Fairness and Feasibility of the Scheme:
The court analyzed the scheme's fairness, noting that it must be just, reasonable, and workable. The court found that the scheme lacked concrete proposals for discharging statutory liabilities and re-employing workers. The court also questioned the financial viability of the scheme, given the limited capital of the subsidiary companies and the significant liabilities involved.

Conclusion:
The court concluded that the scheme proposed by the ex-promoters was not just, fair, or proper. It appeared to be an attempt to transfer the company's assets to close relatives of the promoters without providing adequate provisions for discharging liabilities. The court dismissed all three petitions and directed the official liquidator to proceed with the disposal of the company's assets.

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