9911796707
TMI Blog2005 (11) TMI 253X X X X Extracts X X X X X X X X Extracts X X X X ..... eir meeting held on 1st June 2005 be confirmed, and that, the order sanctioning the modified and amended scheme of compromise/arrangement be deemed to be an order confirming reduction in capital within the meaning of section 102 of the Companies Act, 1956. 2. The Petitioner Company was incorporated on 9-3-1988 under the provisions of Companies Act, 1956. The Certificate of commence ment of business was granted by the Registrar of Companies, Maha rashtra, Mumbai on 9-3-1988. The authorised share capital of the Petitioner is 1,20,00,000 (One crore twenty lakhs) equity shares of Rs. 10 each. The issued, subscribed and paid up share capital is 1,08,16,382 (One crore eight lakhs sixteen thousand three hundred eighty-two) equity shares of Rs. 10 each fully paid. The Petitioner is engaged in the business of manufacturing, convert ing, processing, designing, buying, selling, exporting, importing and/or otherwise dealing in the packaging materials, printing by various printing processes including Rotogravure Printing process way coating and lamination, slitting and sheeting of paper, board, plastic films, polythene, cellophane metal and aluminium foils, manufacture of bags and pouch, ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , petitioner thought it advisa ble and expedient to restructure the debts. The Petitioner Compa ny therefore made reference to the Board of Industrial and Finan cial Reconstruction (BIFR) on the assertion that its accumulated losses has exceeded its net worth, as on 31-12-2002. The said reference however came to be rejected on 29-12-2003. Against that decision, Petitioner Company has preferred an appeal, which is still pending before the Appellate Authority. In the meantime, the Petitioner Company had discussion with Banks and Financial Institutions for financial restructuring. This effort paid divi dends as the Asset Reconstruction Company (India) Limited (ARCIL) registered with Reserve Bank of India under Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 by their letter dated July 9, 2004 informed the Petitioner that the restructuring proposal submitted by them was under examination and may be considered acceptable, subject to approval from their management. Similarly, ICICI Bank Limited by its letter dated 5-4-2004 and State Bank of India vide letter dated 12-5-2004 informed the Petitioner that they have absolutely assigned th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prevailed in the late 1990, have now changed for the better. The Petitioner now expects to be able to make good profit from its operations, which is not possible unless its debt is restructured as proposed in the Scheme; ( e )The FMCG segment for both A B category has witnessed buoyancy and the selling prices have also firmed up. The Peti tioner has had long term relationship with many of its customers who are willing to renew the contracts, if the Petitioner is in a position to meet their demands on timely basis. The availabili ty of fresh working capital would enable the Petitioner to capi talize on its core strengths, such as technology capabilities and products approvals with FMCG customers and achieve 75-80 per cent of its capacity utilization in the first year, with its well established products." 3. As the Petitioner Company is optimistic about overcoming the financial difficulty presently encountered on account of adverse market conditions, as it was already on the road of recovery on account of improved market conditions and being a viable corpo rate entity, capable of recovering itself from such set-backs, if the debts level were to be reduced, has propounded th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red creditors with certain amendments. In view of the approvals accorded by the shareholders, secured creditors and unsecured creditors), Petitioner filed Petition to sanction the Scheme of compromise/arrangement in Company Petition No. 92 of 2005 connected with Company Application No. 338 of 2004. After obtaining fresh orders, meeting of statutory creditors of the Company was convened and held on 10-3-2005 where the amended Scheme was approved by the requisite majority of statutory credi tors. Later on, the Company Petition No. 92 of 2005 for sanction of the Scheme of Compromise/Arrangement which was admitted, came to be advertised in newspapers on 18-3-2005 and fresh advertise ment was published in newspapers on 21-3-2005. During the penden cy of the said Petition, Petitioner Company filed application for seeking directions for holding fresh meeting of unsecured credi tors. On the said application in Company Petition No. 92 of 2005, order was passed on 28-4-2005 directing fresh meeting of unse cured creditors and shareholder on 1-6-2005. The said order, however, was amended by consent of all concerned on 5-5-2005, disposing of Company Petition No. 92 of 2005 and the Company Appli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ehalf of Counsel ap pearing for the respective parties has been considered. It may be mentioned that during the course of arguments, no argument was canvassed on the point of maintainability of the present peti tion. In that sense, I will have to consider the merits of the objections raised on behalf of the intervenors and the workmen union. At the outset, it needs to be mentioned that although appearance was made on behalf of workmen union, and objection was raised with regard to certain clauses, which makes reference to the workers, the Counsel appearing for the Petitioner Company made it amply clear that the Scheme was in no way concerned with the workers. In that, it was not related to any rights and obli gations of the workers at all. The position of the Petitioner Company has been placed on record by affidavit dated 17-8-2005 making it plainly clear that no direction is sought, which would in any way, affect the interest of the workers. Inspite of such a stand taken by the Petitioner Company, and although the Counsel for the workmen union, during the course of arguments, submitted that in that situation, the workmen union will have no objection to the proposed scheme, written ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It was submitted that the correctness of the recording of facts in the report of the Chairman were not in issue at all. But one of the grounds would be that the Chairman has not resorted to proper procedure in terms of the orders of this Court. It is in this backdrop, I proceeded with the hearing of the case, as Counsel appearing for respective parties, on instructions, agreed in that behalf. 10. The sum and substance of the objections raised by the inter venors appearing through Counsel during the course of arguments are as follows: That this Court being Company Court has no jurisdiction to enter tain the present Petition in view of the bar contained in section 32 read with section 26 of the Sick Industrial Companies (Special Provisions) Act, 1985 (hereinafter referred to as SICA ). It is stated that as reference in respect of the Petitioner Company is pending before the BIFR, this Court will have no jurisdiction to entertain the present proceedings. To support this submission, reliance is placed on the decision of the Andhra Pradesh High Court in the case of K. Sitarama Raju v. Board for Industrial Financial Reconstruction [1996] 87 Comp. Cas. 22. It was then conte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... losed by the Petitioner Company. From the figures which are available from record, it is seen, contends learned Counsel, that the liability of payment to se cured creditors would be in excess of inflow of income. If it is so, no payment will be ever received by the unsecured creditors. It is contended that it is common ground that the networth of the Petitioner Company has eroded and if it is so, the Scheme will not be viable and cannot be implementable at all. It is contended that the Scheme is against public policy as the real purpose of the scheme is to absolve the guarantors and directors of the criminal liability. In other words, the main purpose of the Scheme is of stifling of criminal actions pending against the Petitioner Company and its Directors. It is contended that the options provided in the proposed Scheme is nothing but sham, bogus, unfair and unconscionable. In that, Option No.I makes no provision for commitment to pay the entire principal amount, though it provides for repayment spread over in eight years commencing from the second year with 1st year to be observed as moratorium period, insofar as the unsecured creditors are con cerned. The Option No. I provides th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y indulgence on account of its conduct inasmuch as the balance-sheet does not disclose the dues of Videocon International Limited, one of the intervener. The balance-sheet makes no reference to the decree amount payable to the said unsecured creditor. On this count also, the scheme ought to be disapproved. 13. It is then contended that insofar as Videocon International Limited is concerned, it was a separate class of unsecured credi tors. Firstly, because they were Judgment Creditors and their claim has already been adjudicated by Court of competent juris diction. Secondly, because the proposed scheme mainly refers to such unsecured creditors who are expected to have continued transaction with the Petitioner company; whereas Videocon Inter national Limited had only one time transaction with the Petition er company. In that sense, they were separate class or sub-class of unsecured creditors, for which, separate meeting ought to have been convened and their interest ought to have been considered independently. Reliance was placed on the decision of the Madras High Court in the case of D.A. Swamy v. India Meters Ltd. [1994] 79 Comp. Cas. 27 as well as Miheer H. Mafatlal v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tue of section 22 of the SICA. Similarly, the provisions of section 26 of the SICA also have no application in the present case because the provisions of section 26 apply only when order is passed or proposal is made under the SICA which becomes ap pealable except as provided therein and no civil court shall have jurisdiction in respect of those matters which are to be decided by appellate authority of the Board which is empowered under the Act to determine the said issues and no injunction can be granted by any Court in respect of any action taken under the provisions of the said statute. In view thereof, the provisions of section 26 also have equally no application." [Emphasis supplied] (p. 377 of SCL) In para 7, while considering the effect of section 32 of the SICA, this Court went on to observe thus : "If the provisions of sections 391 to 394 of the Act are incon sistent with the provisions of sections 15 to 19 of the SICA, then in that event by virtue of section 32 of the SICA the said provisions will have an overriding effect and shall prevail notwithstanding anything inconsistent under the provisions of sections 391 to 394 of the Act. In my opinion the answer to this qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and are seeking to rearrange its business for the efficient management or better business prospects and, thus, seeks to amalgamate or demerge its business operation of the company. In my view since there is no inconsistency between the provisions of section 32 of the SICA and the provisions of sections 391 and 394 of the Act, there is no question of the provisions of section 32 of the SICA being made applicable to the present case. In my view, therefore, the Court has power and jurisdiction to grant sanction of the scheme under sections 391 and 394 of the Act. In view thereof, I make the present petition absolute in terms of prayer clauses ( a ) to ( d )." [Emphasis sup plied] (p. 381) 16. I am in agreement with the view expressed by Justice S.U. Kamdar in the above decision. To get over this position, counsel for the intervenors had placed reliance on the decision in the case of K. Sitarama Raju ( supra ), wherein, it is observed that as soon as the reference under section 15 is made to the BIFR, the BIFR is seized of the matter and in that case by virtue of section 32 of SICA, the provisions of that Act would prevail not withstanding anything contained in the Companies Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by referring to the report of the Chairman of the meeting. On reading the said report as a whole, it clearly indicates to the contrary. Inasmuch as, what was placed for consider ation was not only the amended scheme, but the original scheme as amended. For para 7 of the report mentions that the Scheme of Compromise/Arrangement was read out and explained by the Chairman to the unsecured creditors present at the meeting. It then men tions that it was clarified that the meeting was held in respect of unsecured creditors. In Para 8, it is mentioned that attention of the unsecured creditors present, was also drawn to the fact that pursuant to the order of this Court dated 27th August 2004, a scheme of compromise/arrangement was circulated to the unse cured creditors and the same was approved by the unsecured credi tors in the meeting held on 18th October 2004. However, the said scheme was subsequently amended by the secured creditors to some extent and some issues/clarification was sought by some of the unsecured creditors during the proceedings before the Hon ble High Court and in order to clarify such issues, the scheme was amended and recirculated to all the unsecured creditors and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... obliged to determine the correct value for the purpose of the meeting, which has not been done. There is no substance even in this submission. Firstly, merely writing some figure on the ballot was not enough. Besides, the value claimed by the inter venors as noted on the ballot by the respective unsecured credi tor was in relation to amount which included interest component. Whereas, the proposed Scheme is in relation to the principal dues of the concerned unsecured creditor as on the cutoff date. As mentioned earlier, it is not open to the intervenors to complain that the Chairman has not determined the correct value of debt for the purpose of the meeting. Such objection was not raised so as to require the chairman to adjudicate the same. At best, it can be said that an issue was raised on behalf of Videocon Inter national Limited, but that was not raising dispute with regard to the value of debt. Instead, only query was put to the Chairman as to what is the (principal) amount shown in the Company s record as according to the Consent Terms, it ought to be Rs. 6,00,00,000 (Rupees Six Crores). In response to the said query, the Chairman verified the position and accepted the stand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contended that if the true and correct outstanding amount was to be reckoned so as to include the interest component, then it would necessarily follow that the scheme has not been approved by requisite majori ty. There is no substance even in this objection. As mentioned earlier, the scope of the scheme is to peg down the amounts to the principal amount payable to the respective creditors as on the cutoff date. The true and correct position of the principal amount due and payable has been placed on record. The argument that if the interest component was to be reckoned, it would follow that the Scheme has not been approved by requisite majori ty, clearly overlooks the factual position that the value of the debt considered by the Chairman of the meeting and in my view rightly, of all the unsecured creditors is only of principal amount as on the cutoff date. If the benefit of interest was to be given to the intervenors, similar provision will have to be made in respect of other unsecured creditors, who have voted in favour of the scheme, in which case, the value of their debt will be proportionately increased, thereby maintaining the percentage of requisite majority in favour of the S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Cal. 442. Insofar as the latter submission is concerned, the fact that Videocon Inter national Limited had only one time transaction with the Petition er, cannot be the basis to treat them as separate class or sub- class of the unsecured creditors. Counsel for the said intervenor would, however, place reliance on the decision of the Madras High Court in D.A. Swamy s case ( supra ) wherein it is observed that broadly speaking, a group of persons would constitute one class when it is shown that they have conveyed all interest and their claims are capable of being ascertained by any common system of valuation. It is then observed that the group styled as a class should, ordinarily, be homogen- eous and must have commonality of interest and the compromise offered to them must be identical. The exposition in this decision is of no avail to the intervenor. It will be useful to advert to Para 38 of the decision of the Apex Court in the case of Miheer H. Mafatlal ( supra ), wherein, it is observed that where a compromise or arrangement is proposed between a company and its members or any class of them a meeting of such members or class of them has to be convened. It is then observed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 391 has no jurisdiction to interdict the criminal actions pending against the company and its directors. In the first place, I would reject the argument that the primary purpose of the proposed scheme is only to ab solve the guarantors and also the directors including of criminal action. On fair scrutiny of the scheme, it gives an impression that the Petitioner Company is making a genuine effort to re structure its debts so as to make the operation sustainable and also to keep the commitment and repayment of its debts to the creditors as per the proposed scheme. Because of approval of the scheme if the liability of the guarantors were to be extricated, that does not mean that scheme is intended only for that purpose. Whereas, as mentioned earlier, the Scheme proposes to keep the commitment of repayment of the debts though at restructured level. Be that as it may, the intervenors may be right to the extent that this Court has no jurisdiction to interdict the criminal actions pending against the Petitioner Company and its guarantors or directors. To that extent, the objection will have to be upheld relying on the exposition of our High Court as well as Delhi High Court. The c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted case of Miheer H. Mafatlal ( supra ) in Paragraph 28A which reads thus : "In view of the aforesaid settled legal position, therefore, the scope and ambit of the jurisdiction of the Company Court has clearly got earmarked. The following broad contours of such jurisdiction have emerged: 1.The sanctioning Court has to see to it that all the requisite statutory procedure for supporting such a scheme has been complied with and that the requisite meetings as contemplat ed by section 391(1)( a ) have been held. 2.That the scheme put up for sanction of the Court is backed up by the requisite majority vote as required by section 391, sub-section (2). 3.That the concerned meetings of the creditors or members or any class of them had the relevant material to enable the voters to arrive at an informed decision for approving the scheme in question. That the majority decision of the concerned class of voters is just and fair to the class as a whole so as to legitimately bind even the dissenting members of that class. 4.That all necessary material indicated by section 393(1)( a ) is placed before the voters at the concerned meetings as contemplated by section 391, sub-section (1). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce or approval of the proposed scheme, that would result in a prejudicial and unfair situation for the unsecured creditors such as the intervenors in whose favour decree has been passed by Court of competent jurisdiction whereunder they would be other wise entitled to receive not only the principal amount but inter est accrued thereon and to be accrued in future. In my opinion, this cannot be the basis for not approving the proposed scheme which has been voted in favour by the requisite majority of the unsecured creditors. I have already taken the view that merely because the intervenors are possessed of decree passed by the Court, they cannot constitute separate class of unsecured credi tors. Their interest is same as any other unsecured creditors whose claim has not been adjudicated by Court of competent juris diction. If that is the legal position, the subject objection cannot be the basis to disapprove the proposed scheme. The Court on the other hand will have to keep in mind other overwhelming circumstances which would warrant approval of the scheme. In that, if the proposed scheme is to be approved, the Company will not only be revived, but would consolidate its financial po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in this perspective, there is no substance in the above objection. 29. It is then argued that the Scheme is sham and bogus and un-implementable because repayment has been spread over in eight years with initial instalments in paltry sum and latter in sub stantial amounts. However, the scheme does not provide for the date of payment, or the period for final payment. Whereas, the outstanding amount has been pegged down to the principal sum and cap has been provided which will result in rolling over of the oversubscribed outstanding dues and at the end of the 8th year, perhaps, even the principal amount will not be received by the unsecured creditors. Besides, the Scheme only provides for upward cap with no commitment for minimum payment. It is also argued that the scheme does not provide for any default clause in the event of non-payment of the outstanding principal amount as on the cutoff date. On the above arguments, it is contended that the scheme as presented is unreasonable, unjust, unconscionable and unimplementable. Indeed, the objections registered on behalf of intervenors, seem to be formidable ones. There are two options provided for the unsecured creditors. In the fir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny will have not only pay 35 per cent of the principal outstanding but in addition, remaining 50 per cent of the rolled over amount, so that, 100 per cent payment of the principal amount is effected at the end of the 8th year. Grievance was rightly made that no default clause is provided insofar as the scheme of unsecured creditors is concerned. To overcome that grievance, the present Scheme is approved "on condition" that non-payment of principal outstanding in terms of the per cent mentioned against the respective years below Option No. I (settlement) and modified to the extent mentioned earlier would constitute default. In case of default and/or delay in payment of monies payable by the Company under the scheme includ ing any reimbursements, if not paid within the stipulated period, shall from the due date, carry interest of 9 per cent per annum, compounded at monthly rest. Besides, if such amounts including interest as aforesaid, are not paid within thirty days, shall further carry additional interest by way of liquidated damages at the rate of 2 per cent per annum in addition to 9 per cent as above. If such provision is made in the proposed scheme, the same would adjust equi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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