9911796707
TMI Blog2006 (12) TMI 221X X X X Extracts X X X X X X X X Extracts X X X X ..... le preference shares of Rs. 100 each fully paid up). 3. The petitioner-company is presently engaged in the manufacture and sale of polyester filament yarn, blended yarn and man-made fabrics. The company operates its business through three separate divisions viz. Modern Syntex, Modern Suitings and Modern Petrofils. Presently, Syntex and Suitings division are lying closed due to labour problem, shortage of working capital and adverse market conditions etc. The petitioner-company states that as a whole it had a good track record of generating profits, rewarding the shareholders and servicing the debts till 1997 since inception. Due to global recession coupled with stiff competition in Textile Industry the petitioner-company suffered significant losses since 1997-99. On account of Gujarat earthquake in January, 2001 the Petrofils division of the petitioner-company also adversely affected. On account of these problems the petitioner-company submitted a reference before the Board for Industrial and Financial Reconstruction, which was registered by the Board. The petitioner-company further given out that on account of various difficulties faced by it, a necessity was left for resche ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the Regional Director, Northern Region filed affidavit and submitted that out of 25 secured creditors who participated in voting, six secured creditors having their debts aggregating to Rs. 107.83 crores voted against the scheme and one secured creditor namely Bank of Baroda Branch abstained from voting. Prayer was made for deciding the case on its merits. 7. Two objectors namely M/s. Indusind Bank Ltd. and Mashreq Bank filed objections. M/s. Indusind Bank Ltd. advanced fund based facility of Rs. 550 lakhs and non-fund based facility of Rs. 554 lakhs in February, 1997 to the Petrofils Division of the petitioner-company. The accrued outstanding principal and interest till date of filing of objection is Rs. 1,508.14 lakhs with future interest @ 20 per cent p.a. The objections filed by the Indusind Bank Ltd. in relation to meeting of secured creditors are as under : ( a )The notice dated 24-8-2005 convening the meeting of secured creditors stated that the said meeting was to be held for the purpose of considering and if thought fit, approving with or without modification, compromise proposed to be made between the said companies and secured creditors of the company. No opportu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y fraudulent preference to selected creditors and oppression of minority creditors by the majority. The copy of scheme given to objector stated that options 1 and 3 have already been filled up and only options 2 and 4 are available. The majority of the secured creditors have by back door negotiations with the petitioner-company secured an unfair advantage for themselves. The minority creditors are being forced to comply with the decision so taken. This constitutes a clear case of oppression of minority creditors by the majority. The objector is being forced to forego a substantial sum towards outstanding principal, accrued interest and future interest. Para E( c ) of the proposed scheme states that the availability of the option shall be determinable on first come first basis. The objector has had no access to options 1 and 3 which were privately negotiated and determined by the petitioner-company to the full extent of capping, even before the scheme was circulated to the secured creditors. No procedure has been laid down regarding distribution of options. The scheme fails to satisfy that the members or class of members of creditors or class of creditors as the case may be were act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with a view to dupe the creditors. The management has been guilty of fraudulent accounting and cannot be trusted to make a bona fide attempt to revive the Petrofils Division. 11. The objector M/s. Mashreq Bank Psc, Mumbai pleaded that it has sanctioned working capital facilities funded Rs. 6.8 crores + LCS Rs. 3.5 crores + Forex contracts by Rs. 6 crores to the Petrofils Division of the petitioner-company. The petitioner-company defaulted in repayment of outstanding and accordingly the objector issued demand notice for repayment of dues. The objector also sent a winding up notice to the company. The total outstanding of the objector-company against the petitioner-company as on 31-3-2000 was Rs. 11,39,36,396.62 with interest of 22 per cent from 31-3-2000. The principal amount due as on 31-3-2000 is Rs. 9.5 crores along with interest. The objector-company taken almost objections raised by M/s. Indusind Bank and also submitted that all loans advanced to the petitioner-company are secured by the personal guarantees of its Director, Management personnel. The loan advanced by objector-Bank is secured by personal guarantees of Mrs. H. S. Ranka and Mr. Kamal Ranka. The scheme specia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny a sick industrial company. It is further submitted that the yarn division of the petitioner-company has been lying closed since October, 1996 because of the lock-out put up after prolonged labour problems due to inter-union rivalry. Similarly, the operations of the suiting division have also been discontinued since October, 2001 due to unfavourable market conditions and the erosion of the entire working capital. ( d )As the net worth of the petitioner-company had become negative, a reference of the petitioner-company was registered with the Board for Industrial and Financial Reconstruction of India (BIFR) based on the audited accounts for the year ending on 31-3-2000. The petitioner-company incurred further losses and the net worth was further eroded. Therefore, the petitioner-company filed a fresh reference based on the audited accounts for the year ending on 31-3-2004 which came to be registered with BIFR on 12-1-2005. ( e )In the light of the aforestated background and with a view to carry on its business effectively, it was necessary to bring down the burden of debts of the petitioner-company from an unserviceable level to a serviceable level. As at 31-3-2004, the compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m )Para 10 of the scheme thus sets out that "the scheme has been worked out after protracted negotiations with the secured creditors" and that the majority of the secured creditors have already approved the restructuring settlement of their debts. Para 13 states : "13. Creditors will benefit through the channel of recovery as the same shall stand to be on the higher end if the company remains a running concern and the same is not put under liquidation. On the other hand, if the liquidation proceedings are initiated, the returns would be at the lower end for the creditors. 14. ** ** 15. The continued operation will ensure the employment to the direct work force of about 1,000 workmen and about 4,000 indirect employment." ( n )As a result of the acceptance of the rehabilitation scheme by the financial institutions, the company was able to commence repayment by 31-3-2005, and this is reflected under the aforesaid Annexure A para 5 (page 2) of the balance sheet, which states as under : "The company is making continuous efforts for sanction of restructuring settlement of its all secured lenders and glad to report that many of the secured lenders have approved settlement of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bank of India, Nariman Point, Mumbai 8.Trishul Traders Pvt. Ltd., Mumbai 9.UFJ Bank Ltd. (Sanwar Bank), Delhi 10.State Bank of India, Delhi 11.Invitation Investment Pvt. Ltd. 12.UTI Bank Ltd., Mumbai 13.BOI, Mutual Fund, Mumbai 14.Mehrauli Traders Pvt. Ltd., Mumbai 15.Deutsche Bank, Mumbai 16.SBI Mutual Fund, Mumbai 17.Vulvan Traders Pvt. Ltd., Mumbai 18.Canbank Mutual Fund, Mumbai ( t )Based on the result of said meeting this petition was submitted for sanction by the company before this Hon ble Court. Pursuant to the notices issued by the Hon ble Court, the Regional Director has filed his affidavit. In his affidavit the Regional Director has not raised any objection whatsoever against any feature of the scheme. ( u )As is seen, all the 18 secured creditors who voted in favour of the scheme were either public financial institutions ("authority" within the meaning of article 12 of the Constitution of India) nationalised banks, foreign banks or private sector bank. The institutions in question are some of the finest financial institutions of the country. ( v )In case of the public financial institutions, nationalised banks, foreign banks and private secto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Kasliwal, counsel appearing along with Mr. Mullick for the Indusind Bank raised objections regarding the relevance of Director s report. Auditor s report and the notes on accounts attached to the balance sheet. ( ii )The second objection was that the meeting of the secured creditors was not convened in a proper manner and thus it was an invalid meeting. He specifically pointed out that the ballot boxes were not sealed, the result of the meeting was not decided immediately and the values of the outstanding amounts was not given in the ballot papers. ( iii )The third objection was that since the petitioner-company s reference is registered with the Board for the Industrial and Financial Reconstruction (BIFR), therefore this Court ought not to exercise its discretion towards sanctioning the petition under section 391 of the Companies Act, 1956. The counsel for the objector relied upon the judgment given by the Hon ble Apex Court in the matter of NGEF Ltd. v. Chandra Developers (P.) Ltd. 2005 (8) SCC 219 1 . ( iv )The fourth objection was that the scheme is oppressive to the minority secured creditors as the same involves excessive sacrifices. ( v )The fifth objection was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a scheme has been complied with and that the requisite meetings as contemplated 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 meetings concerned 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 meetings concerned as contemplated by section 391, sub-section (1). (5)That all the requisite material contemplated by the provisions of sub-section (2) of section 391 of the Act is placed before the Court by the applicant concerned seeking sanction for such a scheme and the Court gets satisfied about the same. (6) That the proposed scheme of compromise and arrangement is not found to be violative of any provision of law and is not unconscionable, nor con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions of section 392. Of course this section deals with post-sanction supervision. But the said provision itself clearly earmarks the field in which the sanction of the Court operates. The supervisor cannot ever be treated as the author or a policy-maker. Consequently the propriety and the merits of the compromise or arrangement have to be judged by the parties who as sui juris with their open eyes and fully informed about the pros and cons of the scheme arrive at their own reasoned judgment and agree to be bound by such compromise or arrangement. Para 12 : Two broad principles underlying a scheme of amalgamation which have been brought out in this judgment are : (1)That the order passed by the Court amalgamating the company is based on a compromise or arrangement arrived at between the parties; and (2)That the jurisdiction of the Company Court while sanctioning the scheme is supervisory only i.e. to observe that the procedure set out in the Act is met and complied with and that the proposed scheme of compromise or arrangement is not violative of any provision of law, unconscionable or contrary to public policy. The Court is not to exercise the appellate jurisdiction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts like an umpire in a game of cricket who has to see both the teams play their game according to the rules and do not overstep the limits. But subject to that how best the game is to be played is left to the players and not to the umpire.... It is obvious that the supervisor cannot ever be treated as the author or a policy-maker. Consequently the propriety and the merits of the compromise or arrangement have to be judged by the parties who as sui juris with their open eyes and fully informed about the pros and cons of the scheme arrive at their own reasoned judgment and agree to be bound by such compromise or arrangement. The Court cannot, therefore, undertake the exercise of scrutinizing the scheme placed for its sanction with a view to finding out whether a better scheme could have been adopted by the parties. The exercise remains only for the parties and is in the realm of commercial democracy permeating the activities of the concerned creditors and members of the company who in their best commercial and economic interest by majority agree to give green signal to such a compromise or arrangement. . . ." (p. 597) In the above-mentioned judgment of Miheer H. Mafatlal s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnational market as a result whereof they started dumping the materials at cheap prices in Europe, and the levy of anti-dumping/anti-subsidy duties by the European Union as a result whereof sales to European countries came down drastically. Para 31 : A restructuring package was evolved at the instance of Industrial Development Bank of India, which was largest lender and the trustee upon obtaining a report in that behalf from KMPG, a reputed concern. A scheme envisaged under section 391 of the Companies Act, it is well settled, is a commercial document. Para 33 : The scope and jurisdiction of the Company Court has been examined at some length by Division Bench of this Court in Miheer H. Mafatlal AIR 997 SC 506 wherein the broad contours of such jurisdiction have been enumerated indicating. 8. That the scheme as a whole is also found to be just, fair and reasonable from the point of view of prudent men of business taking a commercial decision beneficial to the class represented by them for whom the scheme is meant. Para 35 : It is not the case of appellants that the learned Company Judge exceeded his jurisdiction and acted in violation of the said guidelines. Once it is hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reedom exercised by the creditors. The Company Court merely acts like an umpire in the game of cricket and sees that both the teams play the game according to rules. C. Propriety or the merits of the compromise have to be judged by the parties who have, sui juris, with their open eyes and fully informed about the pros and cons of the scheme, arrived at their own reasoned judgment. The exercise is in the realm of commercial democracy permeating the activities of concerned creditors and members of the company, who, in their best commercial and economic interests by majority, agree to give a green signal to such a compromise or arrangement. D. A minority cannot be allowed to exercise veto power and thereby scuttle a bona fide attempt to revive a company as the revival is the predominant intention as is reflected in a series of Parliamentary legislation. E. The Court will decline to sanction a scheme of merger, if any tax fraud or any other illegality is involved. [Emphasis supplied] 18. In the instant case, there is no controversy in relation to the manner in which the meetings were convened, the disclosures were made, notices were sent to the creditors and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , in all the whole of Rs. 45 crores are being inducted by the promoters towards equity capital. 24. So far as Ferguson report is concerned, I notice that it was drawn in the year 2000. Under the said report while Rs. 45 crores were required to be inducted by way of equity and Rs. 45 crores were to be brought into the company by way of sale proceeds of the defunct spinning and weaving units of the company (Modern Suitings and Modern Syntex), lying closed at Alwar for the last 5 to 10 years. Under the current scheme also, the said assets are proposed to be sold, in order to realize the proceeds from the sale of the said assets and to bring them into the company and the balance Rs. 45 crores as shown above are being brought in as equity. 25. The issues relating to commercial complexity, in my opinion, cannot be gone into in the course of scrutiny under section 391 of the Companies Act. 26. That takes me to the prime contention of the objector that since the matter is pending before the BIFR, the scheme under section 391 ought not to be approved. Learned counsel for the objectors in support of this contention, placed reliance on NGEF Ltd. s case ( supra ). 27. In repl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Division Bench has reversed the view taken by the learned Single Judge in the case of Gontermann-Pipers (India) Ltd. [2005] 57 SCL 225 (HP). Insofar as the aforesaid argument is concerned, I find that on a plain and simple reading of section 22 of the Act it is clear that the suspension of legal proceedings is only in respect of winding up of the industrial company or for execution or attachment of any of the properties of the industrial company for appointment of the Receiver. Insofar as the guarantors are concerned, the limited protection is granted that is no suit for recovery of money or for enforcement of any security against the industrial company or of any guarantee in respect of any loan granted to the industrial company shall lie. In my view on a plain and simple reading of section 22 the law did not contemplate the suspension of any proceedings under sections 391 to 394 of the Companies Act, 1956. . . ." (p. 926) ". . .However, the moot question, which requires to be considered in the present case, is the effect of section 32 of the SICA. The provision of section 32 is an overriding provision. . . ." (p. 927) "If the provisions of sections 391 to 394 of the Compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A operate in slightly different sphere, i.e., the case where the net worth of the company has become negative, whereas the provisions of sections 391 to 394 have no such requirement as condition precedent and this provision can even operate in cases where the companies are doing quite well and are seeking to re-arrange their business for the efficient management or better business prospects and thus seek to amalgamate or demerge their 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 Companies 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 Companies Act, 1956. In view thereof, I make the present petition absolute in terms of prayer clauses ( a ) to ( d )." (p. 931) ( ii )Bombay High Court in Sharp Industries Ltd., In re [2006] 131 Comp. Cas. 535 1 , relied upon the above judgment and held as under : "Reverting to the first objection taken on behalf of the inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stice S.U. Kamdar, the scheme of two enactments operates indifferent spheres, though not inconsistent with each other. If it is so, the question of electing one of the two remedy does not arise." (p. 552) ( iii ) Gountermann-Peipers (India) Ltd. v. UOI [2005] 126 Comp. Cas. 489 (HP). ( iv ) Phlox Pharmaceuticals Ltd., In re [2005] 63 SCL 237 (Guj.). ( v ) Pharmaceutical Products of India Ltd., In re High Court of Bombay [decided on 13-2-2006 : reported in 2007 (1) AIR Bom. R (NOC) 125]. 29. It is further stated that the judgment of the Hon ble Supreme Court in the case of NGEF Ltd. ( supra ) has no application in the facts and circumstances of the present case. The facts that lead to the issue that arose in that particular case are as under : NGEF Limited (the company) became a sick company and consequently a reference was made to the BIFR. The BIFR having opined that the company cannot be revived, recommended the winding up of the company and sent the said recommendation to the High Court. Upon receipt of the recommendation, the High Court registered the same as Company Petition No. 154 of 2002. During the pendency of such a petition and before the petitio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d up, the Hon ble Supreme Court held that the act of the Company Court was invalid. Given the concept of limited jurisdiction of High Court, under section 20(4) of SICA as against section 536(2) of Companies Act, Hon ble Supreme Court held, that on a correct reading of the Companies Act, 1956, the Company Court cannot be accepted to be possessed with the power to order sale, and that by law, prior to the winding up of the company, the power of sale, was by virtue of the explicit provisions of section 20(4) of SICA, available only with BIFR and not with Company Court. It was also noted that : ( a )winding up petition not having been admitted as yet, the Company Court was not even seized of the matter; ( b )The Company Court itself had taken a diametrically opposite interpretation in relation to the first application which was absolutely identical. ( c )That on the merits also it could not have been sought to be a concluded contract since the approval of the sale by company was a conditional approval subject to consent of Central Government and such consent was not available. It was in this background that the Hon ble Supreme Court held that it was not a Company Court but B ..... X X X X Extracts X X X X X X X X Extracts X X X X
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