2019 (5) TMI 483 - HC - Companies Law

Scheme of arrangement to improve net worth through partnership - Convention of the meeting of secured and unsecured creditors of the applicant company - approval and implementation of proposed scheme of arrangement to pay to the creditors - HELD THAT - There is a clear approval of the scheme in the meeting of the statutory creditors and the employees. There is however some confusion in the meeting regarding unsecured creditors and secured creditors. Coming to the meeting of the unsecured creditors, it is clear from the report of the Chairman that what was put to vote in the meeting was a scheme envisaging that 50% of the debt of the unsecured creditors would be paid over a period of 24 months. Orally, in the middle of the voting procedure, the scheme was modified based on an oral offer of the petitioner Company that the petitioner Company would try and pay 100 % payment to the unsecured creditors of their outstanding dues. This aspect was reiterated in court when the hearing took place. Taking into account the error in the report, the votes cast in the meeting for the modified scheme i.e. payment of 100% debt and no objections given by some of the creditors in court, the new scheme appears to have got the support of more than 70% of the value of unsecured creditors but still falls short of three-fourth of the value of the creditors. Secured Creditors - HELD THAT - It is stated by the learned senior counsel for the petitioner that there are only two secured creditors. Both were present in the meeting but could not vote as their representatives were not duly authorized. The net result is that the Chairman had no option but to invalidate the proceedings and hold that the meeting could not reach at a conclusion. Essentially the meeting lacked quorum. However, as rightly pointed by the learned senior counsel for the petitioner, none of the two secured creditors has filed any objections in court against the scheme. It be appropriate for this court to completely outrightly reject the scheme and to scuttle the initiative sought to be taken by the petitioner company to try and revive itself. In equity it would be in the interest of justice that a fresh meeting is called of the unsecured creditors to vote freshly for the newly propounded scheme of the petitioner Company for the unsecured creditors, namely, repayment of 100% dues within a period of 24 months. A similar direction, in the interest of justice, may also be given for a fresh meeting of secured creditors. The petitioner company may convene a meeting of the unsecured creditors to consider and if appropriate, to approve the modified scheme of the petitioner for repayment of 100% of the outstanding debt and a meeting of the secured creditors for both class of creditors. List on 23.04.2019 for further consideration.

Issues Involved:
1. Application under section 391 of the Companies Act, 1959.
2. Convening and conducting meetings of creditors and employees.
3. Approval and implementation of the proposed scheme of arrangement.
4. Objections to the scheme.
5. Compliance with statutory requirements under sections 391 and 392 of the Companies Act.
6. Consideration of subsequent consents and modifications to the scheme.

Detailed Analysis:

1. Application under section 391 of the Companies Act, 1959:
The petitioner filed an application under section 391 of the Companies Act, 1959, seeking to dispense with the meeting of shareholders and to convene meetings of secured and unsecured creditors to approve and implement a proposed scheme of arrangement to pay creditors. The company faced a financial crunch after IBM transferred the Master Services Agreement to another company. The proposed scheme created four Classes of creditors and outlined specific repayment plans for each class.

2. Convening and conducting meetings of creditors and employees:
The court directed the convening of meetings for secured creditors, statutory creditors, unsecured creditors, and employees on 25.10.2016. The quorum was set at 50% in number and more than 50% in value of the total unsecured debt. The meetings were held after several extensions, and the Chairmen filed their reports.

3. Approval and implementation of the proposed scheme of arrangement:
The scheme proposed 100% payment of statutory dues and secured creditors within 24 months, 50% payment of unsecured creditors within 24 months, and specific payments to employees. The scheme received mixed responses:
- Employees approved the scheme with a majority.
- No voting took place for secured creditors due to lack of authorization letters.
- Statutory creditors approved the scheme by majority.
- Unsecured creditors expressed confusion and dissatisfaction, leading to the scheme's rejection in their meeting.

4. Objections to the scheme:
Two objections were filed against the scheme. 'My Kind of Vacations Private Limited' withdrew its objection upon assurance of 100% principal payment. DLF Assets Private Limited opposed the scheme, claiming a higher outstanding amount than stated by the petitioner.

5. Compliance with statutory requirements under sections 391 and 392 of the Companies Act:
The objector argued that the scheme was rejected by secured and unsecured creditors and that all material facts and the latest financial position were not disclosed. The petitioner countered that all relevant financial documents were filed, and the scheme had the necessary approvals.

6. Consideration of subsequent consents and modifications to the scheme:
The court noted that consents received after the meetings could be considered. Three unsecured creditors withdrew their objections upon assurance of 100% payment. The court found that the new scheme had substantial support but still fell short of the required three-fourths majority.

Conclusion:
The court emphasized the importance of reviving the company over winding it up and decided to give another opportunity to the petitioner to convene fresh meetings for unsecured and secured creditors to vote on the modified scheme proposing 100% repayment of dues within 24 months. The petitioner was granted liberty to move an appropriate application to convene such meetings. The case was listed for further consideration on 23.04.2019.

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