2013 (5) TMI 657 - HC - Companies Law

Compromise and arrangement - whether while sanctioning the Scheme proposed by the appellants/ propounders the Sugar Development Fund (SDF), a Government Company shall remain outside the Scheme - appellant-company registered as a sick company before the BIFR winding up of the company was recommended & during the pendency of the winding up petition promulgated a scheme for its revival - Held that - SDF in terms of its extant rules could not restructure its debts it was legally not permissible the SDF is also a Government company and in fact, a clear and categorical statement had been recorded in the order dated 31-3-2006 which was to the effect that the Government companies which included the SDF would not be a part of the Scheme. The further submission being that this order is even otherwise not the subject matter of challenge what has been challenged before the Court is only the order dated 31-3-2006. Record shows that IFCI (Nodal Agency of SDF) did not have the requisite authority to cast its vote on behalf of the SDF and had, thus, been precluded from casting its vote. It has wrongly been recorded in the report dated 22-7-2005 that the SDF has voted in favour of the Scheme. The submission of the appellant that a 3/4th majority of the secured creditors had voted in favour of the Scheme is, thus, incorrect. Section 392 envisages a situation of 3/4th majority of the creditors present and voting. The SDF was neither present nor did it vote. This is substantiated from the record. Company Application had enlisted the list of secured creditors computing their liability. An amount of Rs. 182 lakhs had been shown as due to the IDBI. A sum of Rs. 149.60 lakhs was due to the IIBI. This is mentioned in the proposed scheme of arrangement itself. Submission of the appellant that 75 per cent of the secured creditors had voted in favour of the Scheme is, thus, an incorrect fact. The language of sections 391 and 393 makes it abundantly clear that when the company Court is called upon to sanction a Scheme it is in fact the duty of the Court to go through the proposed Scheme carefully and find out whether all the provisions of law and directions of the Court as to the conduct of meetings have been complied with and whether Scheme is in the interest of the Company as well that of its creditors and only then it should be given effect to. The order dated 31-3-2006 had noted that the promoters of the Scheme had in fact pointed out that the loans of the Central Government should be kept outside the scope of the Scheme and their claim could be apportioned. While expressing its reservation to the proposed Scheme, the Single Judge had however noted that it could in no manner be presumed that the Central Government had agreed to entirely waive off its custodian loan of Rs. 5461.10 lakhs to nil or to reduce SDF loan (also a Government loan) from Rs. 728.60 lakhs to Rs. 182.15 lakhs. Both these loans being Central Government loans were permitted to be treated as outside the Scheme. The different parameters for settlement with the IDBI and IIBI by paying of 40 per cent of their total dues whereas the Government dues of which the custodian loan was sought to be reduced to nil and the SDF loan being reduced to 25 per cent of its principal was also noted. These distinct parameters applied qua different secured creditors was against fairness. Accordingly, on the specific request of the promoters, a concession was granted and the Government loans which included not only the custodian loan but also the SDF loan were kept outside the Scheme. The scheme of arrangement, was in fact sanctioned only to benefit the class of unsecured creditors and the employees as apart from the OTS settlement with the IDBI and IIBI, the Scheme envisaged payment to the said persons. The Company Judge had noted that in the eventuality that the Scheme is not sanctioned there could be no other alternate but to wind up the company because the dues of the Company were enormous. Thus SDF loan also being a Government loan, both the custodian loan and the SDF were to be excluded from the purview of the Scheme. The Company Judge has ample power to pass such an order.

Summary

Issues Involved:
1. Whether the Sugar Development Fund (SDF) should be included in the Scheme of Arrangement.
2. Validity of the Company Judge's decision to exclude SDF from the Scheme.
3. Whether the Scheme of Arrangement was fair and just to all creditors.

Issue-wise Detailed Analysis:

1. Whether the Sugar Development Fund (SDF) should be included in the Scheme of Arrangement:

The appellant challenged the Company Judge's decision to exclude the SDF from the Scheme of Arrangement. The Scheme, proposed by the management/promoters of the Company, aimed at reviving the sick company, M/s Lakshmiji Sugar Mills Company Ltd., which was registered as a sick company before the Board of Industrial Financial Reconstruction (BIFR). The Scheme listed the secured creditors, including the SDF, and the amounts due to each. The SDF, represented by the Ministry of Food, Government of India, had a principal amount due of Rs. 728.60 lacs and interest of Rs. 722.81 lacs, totaling Rs. 1451.41 lacs. The Company Judge noted that the SDF should remain outside the Scheme as it was not possible for the SDF to write off its loan under the extant rules. This decision was based on the fact that the SDF, through its nodal agency IFCI, did not have the requisite authority to represent SDF in the meeting of the secured creditors and had explicitly stated that the SDF loan should be kept outside the Scheme.

2. Validity of the Company Judge's decision to exclude SDF from the Scheme:

The Company Judge's decision was challenged on the grounds that it was not within the judge's domain to modify the arrangement approved by a 3/4th majority of the secured creditors. The appellant argued that the Company Judge should have accorded an absolute sanction to the Scheme, citing the case of Miheer H. Mafatlal v. Mafatlal Industries Ltd., which emphasized that the company court's jurisdiction is peripheral and supervisory, not appellate. However, the court found that the SDF did not vote in favor of the Scheme, as the representative from IFCI did not have the authority to cast a vote. The letter from IFCI dated 18.10.2005, prior to the meeting of the secured creditors, clearly stated that the SDF loan should be kept outside the Scheme. The Company Judge noted that the Scheme was unfair to the SDF, as it proposed a 25% settlement of dues for the SDF while offering 40% to other secured creditors like IDBI and IIBI.

3. Whether the Scheme of Arrangement was fair and just to all creditors:

The court examined whether the Scheme was fair, just, and reasonable to all creditors. Sections 391 and 393 of the Companies Act require the court to ensure that the Scheme is not contrary to any provisions of law and does not violate public policy. The court found that the Scheme discriminated against the SDF by offering a lower settlement percentage compared to other secured creditors. The principle that all creditors within the same class should be treated equally was violated. The court emphasized that the fairness of the Scheme must be maintained for it to bind even the dissenting creditors. The Company Judge had noted that excluding the SDF from the Scheme was necessary to ensure fairness and prevent discrimination among creditors.

Conclusion:

The court concluded that the Company Judge's decision to exclude the SDF from the Scheme was deliberate and intentional, based on the reasons discussed. The Scheme was sanctioned to benefit unsecured creditors and employees, and the exclusion of the SDF was necessary to maintain fairness. The appeal was dismissed, and the impugned order was upheld, with the court finding no infirmity in the Company Judge's decision. The appeal was dismissed, and parties were to bear their own costs.