2009 (8) TMI 1207 - HC - Companies Law

Summary

Issues Involved:
1. Prior permission of secured creditors for the scheme of arrangement of demerger/amalgamation.
2. Rights of secured creditors over securities.
3. Necessity of convening a meeting of secured creditors.
4. Lack of notice to creditor banks.
5. Suppression of material facts before the court.
6. Allocation of liabilities to the textile division.
7. Bona fides of the demerger and amalgamation scheme.

Detailed Analysis:

1. Prior Permission of Secured Creditors:
The secured creditors, including Corporation Bank, Dhanalakshmi Bank, State Bank of India, and Lakshmi Vilas Bank, argued that the scheme of arrangement for demerger/amalgamation was made without their prior permission. The court noted that the company had agreed in their loan agreements not to effect any scheme of amalgamation or reconstruction without the written consent of the secured creditors. This was stipulated in clauses such as 42(b) of the agreement. The court found that the company had violated these clauses by proceeding with the scheme without obtaining the necessary permissions.

2. Rights of Secured Creditors Over Securities:
The secured creditors contended that the arrangement, if approved, would result in them losing their rights to proceed against the securities originally furnished by RSL Industries. The court noted that the company's argument that the securities and charges would remain intact was not tenable. The court found that the demerger scheme transferred all liabilities to the textile division, which would adversely affect the security position of the banks. The court rejected the company's contention that the agreement for prior consent was invalid.

3. Necessity of Convening a Meeting of Secured Creditors:
The secured creditors argued that a meeting of the secured creditors should have been convened and conducted. The court acknowledged that while Section 391 of the Companies Act does not mandate a meeting of creditors in a scheme between the company and its members, it emphasized that the court has a duty to ascertain whether the scheme would affect the creditors' interests. The court found that the secured creditors were kept in darkness and were not given an opportunity to be heard, which was necessary given the potential adverse effects on their interests.

4. Lack of Notice to Creditor Banks:
The secured creditors claimed they were kept in darkness from the commencement of the proceedings until the court approved the scheme. The court noted that despite repeated requests from the State Bank of India for a consortium meeting to discuss the developments, the company failed to convene such a meeting or inform the secured creditors about the proceedings. The court found that the company intentionally withheld information and did not place the real situation before the company court.

5. Suppression of Material Facts Before the Court:
The secured creditors argued that the company suppressed necessary details before the court. The court highlighted the importance of disclosing all material facts, including the latest financial position and existing liabilities, to the court as required under Section 391 of the Companies Act. The court found that the company failed to disclose these facts, which would have influenced the court's decision to grant approval for the scheme.

6. Allocation of Liabilities to the Textile Division:
The court noted that under the demerger scheme, all liabilities were transferred to the textile division, which was highly advantageous to the consortium banks that financed the leather division. The court found that this allocation of liabilities would adversely affect the interest of the secured creditors, as the security position could not continue as it originally stood.

7. Bona Fides of the Demerger and Amalgamation Scheme:
The secured creditors contended that the scheme lacked bona fides and was an attempt to defraud the banks. The court found that the company's actions, including not obtaining prior consent, not convening a consortium meeting, and suppressing material facts, indicated a lack of bona fides. The court emphasized the importance of protecting public interest and found that the scheme, as approved, would adversely affect the secured creditors and public interest.

Conclusion:
The court concluded that the approval of the scheme of arrangement/amalgamation by the single judge was valid and effective subject to the approval by the secured creditors. The court dismissed the appeals, confirming the order of the learned single judge and emphasizing the necessity of protecting the interests of the secured creditors and public interest.