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TMI Blog2004 (6) TMI 328X X X X Extracts X X X X X X X X Extracts X X X X ..... st and 2nd petitioners-Companies had earlier filed Company Petition No. 12 of 2003 in this Court under section 391(1) of the Companies Act, 1956 praying for convening the meeting of the shareholders of both Companies for consideration and approval of the Scheme of Arrangement between Ist petitioner-Company and 2nd petitioner-Company as also for consideration of other ancillary matters. The purpose and object of the Scheme was to enable the 2nd petitioner-company to undertake the business of the established undertaking and result in independent and optimum growth and development of the spinning mill business and iron and steel rolling division through two separate Companies which will ultimately benefit the Companies, their shareholders, employees, creditors and other concerned. The scheme will facilitate the rationalization of the financial structure. The two projects would be thus implemented effectively and adequately. The management of the two projects by two separate companies would be convenient and advantageous with independent management set up and great focus on specialization. The demerger of the Companies would result in better administration, operational organization and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment through its Regional Director, Department of Company Affairs. Mr. K.D. Sood, Advocate got the notices published in the news-paper. When the matter came up before the Court on 10-12-2003. SBI had filed its objections to the Scheme of demerging the Ist and 2nd Companies. The petitioners-Companies filed reply to the said objections. Affidavit of the Regional Director Northern Region, Department of Company Affairs has also been filed. Subsequently, 'IIBI' had also filed their objections. Thereafter the matter was heard in part on 24-3-2004, 25-3-2004 and 31-3-2004 by the learned Company Judge. Order dated 2-4-2004 of the leaned Judge reveals that 1st petitioner-company has made a reference to the Board for Industrial and Financial Reconstruction (BIFR) under the Sick Industrial Companies (Special Provisions) Act, 1985 (for short 'the SICA') and the said reference was subsequently registered. The learned Single Judge adjourned the matter for 22nd April, 2004 to consider the effect of section 22 of 'the SICA' consequent upon the registration of the inquiry against 1st petitioner-company. It appears from the record that the petitioners- Companies carried the order dated 2-4-2004 of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rds the limits so availed, thus, the same shall result in diluting the charge over the property at the Roll Division as the property is charged on first charge basis in favour of the objector bank for its Foreign Currency Loan Facility. (b)Because the scheme of arrangement is lopsided in favour of the first applicant-company, i.e., post demerger the Roll Division which in fact is the profit-making division, inasmuch as all the liability post- demerger are fastened upon the textile division which in fact is running into losses. By the proposed Scheme of Arrangement the roll Division will be cleared of a substantial portion of the liabilities and the charges of all nature. (c)Because in terms of para 42(b) page 29 of the loan agreements on Form C-1, executed by the first applicant company, i.e., the borrower, agreed that it shall not during the subsistence of its liability to the objector bank under or in respect of any of the aforesaid credit facilities without the written consent of the bank, affect any scheme of Amalgamation or Reconstitution, however, the first applicant-company did not obtain the written consent of the objector bank nor did the first applicant-company discharg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he shareholders is a condition precedent before modifications could be put to the unsecured creditors of the applicant-company. ( i) and (j) ** ** ** (k)Because the loan was given on the basis of the major promoter of the first applicant company Sh. Pramod Mittal, presently the Chairman and Managing Director, having 7,49,520 shares and Sh. V.K. Mittal, presently Joint Managing Director, who had 7,38,297 shares and in the second applicant-company after the demerger the major promoter of the company Sh. Promod Mittal has ceased to be even a shareholder. Moreover Sh. Pramod Mittal has also stood as guarantor of the loan facilities granted to the first applicant-company. Thus security cover as provided for to the objector bank by the promoters of the company has been eroded. (l)Because the segregation of the Roll Division and the Textile Division into two separate companies shall paramount result in segregation of the cash flows to different accounts which is contrary to the very foundation of the agreement and the security documents entered between the objector and the applicant-company. ( m) and (n) ** ** ** (o)Because the whole process of drawing up of the Scheme of Arr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o fall in line. 9. In reply to para 8-A of the objections, petitioners-companies justified the modified scheme of arrangement on the ground that the liabilities and accumulated losses in respect of the Textile Division of Ist petitioner-company only are being transferred to the Resultant Company and all liabilities relating to Roll Division of the Ist petitioner-company are left with the Roll Division only. The Roll Division of the Ist petitioner-company was not performing well in view of global recession in Iron and Steel Industry coupled with Anti Dumping Duty by America and other European Countries as well as increase in costs of inputs. The Roll Division of the Ist petitioner-company incurred a net loss of Rs. 16.66 crores for the period ended 31st December, 2002 whereas the same had incurred a net loss of Rs. 4.59 crores only for the 18th month period ended on 30th September, 2001. The business losses and other financial charges of both the Divisions of the company are resulting in negative growth of the Ist petitioner-company as a whole and also obstructing the future growth of both the Roll and Textile Divisions. The Chief Manager and Assistant General Manager of SBI attend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... umstances under which the drawing power was reduced to nil. In fact, the petitioner-Company siphoned-off the objector Bank's funds and diverted towards meeting losses, whereas the funds were meant for meeting working capital requirements. The repayments in instalments was a proposal mooted by the Ist petitioner-company in lieu of the objector-bank not proceeding against the company under process of law as available to the objector-bank to recover the outstanding loan. The modification to the Scheme was never put to the objector-bank prior to the meeting of the secured creditors, thus the petitioners-companies were in no manner interested in safe guarding the rights of the objector bank and on this short grounds the Scheme is liable to be discarded. The change of management of the 1st petitioner-company has never been duly intimated to the objector bank and the same shall also adversely affect the rights of the objector bank as it has resulted in diluting the securities and interest of the promoters of the 1st petitioner-company in the day-to-day running and business activities of the company. 12. In reply to the replication of SBI, the petitioners-companies have stated that SBI ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... titioner-company. 13. IIBI objector to the Scheme of Arrangement of demerger of 1st and 2nd petitioners-companies, in their objection has stated that 1st petitioner-company in 1996 undertook a diversification scheme in its existing divisions (first being the Rolls division at Pailan, West Bengal and the second being the Textile Division at Nalagarh, HP) by setting up production facilities in its first division for manufacture of forged Roll with an installed capacity of 3300 tpa. The estimated cost of Rs. 4,180 lakhs was appraised by IFCI. As per the demerger proposed by the company, Textile Division with IDBI as lead Bank will be hived off into GPI Textile Ltd. (2nd petitioner) and the Roll division will remain with 1st petitioner. At the request of 1st petitioner-company, IIBI on 4-8-1995 sanctioned an EFS loan of Rs. 888 lakhs, out of which Rs. 885.24 lakhs was duly disbursed by the objector. 1st petitioner-company thereafter failed to adhere to the repayment schedule as agreed in the terms and conditions of the agreement. Consequently, the objector Bank cancelled the disbursal of the balance loan amount and further at the request of 1st petitioner-company restructured its outs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the implementation of the scheme. There is no arrangement or compromise with any of the creditors of the GPIL and the rights and the liabilities of all the bona fide creditors including IIBI will continue to remain intact. IIBI has appointed its nominee on the Board of Directors of 1st petitioner-company as Director and their nominee will continue to act as Director of 1st petitioner-company and will be able to safeguard the interest of the IIBI in times to come. The modifications which have been proved at the shareholders and creditors meeting of 1st petitioner-company was proposed by IDBI and seconded by other Financial Institution including EXIM Bank, WBIDC, Allahabad Bank and State Bank, Indore who have provided financial assistance in respect of only Roll Division of 1st petitioner-company and none of them objected to the modifications and modified scheme of arrangement. The modifications and modified scheme of arrangement was approved at the creditors meeting of 1st petitioner-company by the creditors which constitutes 91.45 per cent in terms of value against 8.55 per cent and in terms of number 62 creditors equivalent to 97.87 per cent voted in favour of modifications and m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entation or where an appeal under section 25 relating to an industrial company is pending, then, notwithstanding anything contained in the Companies Act, 1956 (1 of 1956), or any other law or the memorandum and articles of association of the industrial company or any other instrument having effect under the said Act or other law, no proceedings for the winding up of the industrial company or for execution, distress or the like against any of the properties of the industrial company or for the appointment of a receiver in respect thereof and no suit for the recovery of money or for the enforcement of any security against the industrial company or of any guarantee in respect of any loans or advance granted to the industrial company shall lie or be proceeded with further, except with the consent of the Board or, as the case may be, the Appellate Authority." 19. The term 'Board' is defined in section 3(b) of the SICA to mean the Board for Industrial and Financial Reconstruction established under section 4. The expression 'industrial company' is specified in section 3(e ) to mean a company which owns one or more industrial undertakings and the expression 'sick industrial company' has b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y determination by a board of experts of the preventive, ameliorative, remedial and other measures which need to be taken with respect to such companies and the expeditious enforcement of the measure so determined and for matters connected therewith or incidental thereto." Even the Notes on the Clauses appended to the Statements of Objects and Reasons speak of suspension of legal proceedings with respect to such industrial companies, in relation to the provisions contained in section 22 of 'the SICA' without any reservation or exclusion of the proceedings continued by such company against an order passed in the matter originated from the proceedings instituted by others against the company. 22. The Hon'ble Supreme Court in the case of Maharashtra Tubes Ltd. v. State Industrial & Investment Corpn. of Maharashtra Ltd. [1993] 78 Comp. Cas. 803 held : ". . .Section 22(1) provides that during the pendency of (i ) an inquiry under section 16, or (ii) preparation or consideration of a scheme under section 17, or (iii) an appeal under section 25, no proceedings for winding up of the concerned industrial company or for execution, distress or the like shall lie or be proceeded within relat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other than the industrial company, nor it specifies that the proceedings initiated or continued by the industrial company in relation to monetary claim or the matters relating to its properties or assets against such industrial company do not attract the said provision of law. Therefore, the provision, as it stands, merely prescribes embargo over the proceedings relating to monetary claim and pertaining to the properties and assets against such industrial companies without the consent of the Board or the appellate authority, as the case may be. 26. In Real Value Appliances Ltd. v. Canara Bank [1998] 16 SCL 445 (SC), their Lordships observed that inquiry under section 16 of the SICA must be treated as having commenced as soon as the registration of the reference is completed after scrutiny and that from that time, action against the Company's assets must remain stayed as stated in section 22 till final decisions are taken by the BIFR. The ratio of the decision in Industrial Finance Corpn. of India v. Maharashtra Steels Ltd. [1990] 67 Comp. Cas. 412 (All.), the High Court of Himachal Pradesh in Orissa Sponge Iron Ltd. v. Rishabh Ispaat Ltd. [1993] 78 Comp. Cas. 264 , holding that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and brand names used by company to transferee holding that the objections of one creditor was not of much weight. A reference under section 15(1) of the SICA was considering by BIFR at the hearing held on 21-10-2002. While declaring the company as sick, the Board had noted that the Company had already filed a restructuring proposal before the High Court of Karnataka. After the decision of the Company petition the learned Single Judge of the Karnataka High Court, BIFR passed the following order on 27-3-2003 : "The Board considered the relevant documents leading to the approval of the scheme of arrangement under sections 391 and 394 of the Companies Act, 1956 by the Hon'ble High Court of Karnataka vide their order dated 13-2-2003 and also the audited balance sheet for the year ending 30-9-2001 pursuant to the sanction of scheme. The Board has noted that with the approval of the scheme of arrangement by the High Court of Karnataka, net worth of the company has become positive. Accordingly, Kirloskar Electric Co. Ltd. is no more a sick industrial company under the purview of the Act. Hence, the company stands discharged from the purview of the Act with immediate effect." 31. It appea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the petitioners-companies' themselves or initiated by other against them. 33. The decisions in Maruti Udhyog Ltd. v. Instrumentation Ltd. [1995] 82 Comp. Cas. 455 (Raj.); M.V. Damodaran v. Registrar of Co-operative Societies [1999] 95 Comp. Cas. 116 (Mad.); Space Capital Service v. Prakash Industries Ltd. [2000] 101 Comp. Cas. 437 1 (Delhi); Essorpe Mills Ltd. v. Central Provident Fund Commissioner [2001] 104 Comp. Cas. 588 (Mad.), cited at the Bar by the learned senior counsel for objector SBI are noticed. 34. As noticed hereinabove 1st petitioner-company has already made a reference to the BIFR which has been subsequently registered, therefore, the present proceedings deserve to be suspended till further orders. As the present proceedings are kept in abeyance, I do not consider, it necessary or expedient to record any finding on the merits of the modified scheme of arrangement proposed to be approved by means of this Company Petition as well as the objections filed by the SBI and IIBI objectors to the said scheme, though lengthy arguments were addressed by the learned senior counsel and other counsel appearing for the petitioners' companies and objectors during hearing of this ..... X X X X Extracts X X X X X X X X Extracts X X X X
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