9911796707
TMI Blog2006 (12) TMI 221X X X X Extracts X X X X X X X X Extracts X X X X ..... cent cumulative redeemable 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 ..... 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 opportunity w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 acting on a side and in good faith and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 specially envisages that all personal guarantees shall stand discharged on pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 company's financial position was in doldrums as is reflected by the details set out hereunder : Accumulated losses R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ready 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 their dues. This has resulted into write back of principal and interest during the year under review and have been included in the exceptional items shown under financial results. The company is mak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utsche 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 sector banks, the decision as to the manner in which the voting right is to be exercised in the creditors' meeting for approval of scheme, is decided by the Board of Directors of the said financial institutions. Obviously, such Boards, which are manned by some of the finest financial experts, arrive at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eting. 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 2191. (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 that since different options have been offered to the different secured creditors therefore they constitute separate classes amongst themselves. Apart from the above objections, learned counsel also urged that there is no proposal in the scheme for ensuring the continuous employment of the employees, and that the accounts of the company are not properly drawn, etc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 contrary to public policy. For ascertaining the real purpose underlying the scheme with a view to be satisfied on this aspect, the Court, if necessary, can pierce the veil of apparent corporate purpose underlying the scheme and can judiciously x-ray the same. (7) That the Company Court has also to satisfy itself that members or class of members or creditors or class of creditors, as the case may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 and examine the commercial wisdom of the compromise or arrangement arrived at between the parties. The role of the Court is that of an umpire in a game, to see that the teams play their role as per rules and do not overstep the limits. Subject to that how best the game is to be played is left to the players and not to the umpire. Both these principles indicate that there is no adjudication by the Court on the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 case (supra), Their Lordships referred the judgment of Hon'ble Supreme Court in the case of Employees' Union v. Hindustan Lever Ltd. in the following terms : "Section 394 casts an obligation on the Court to be satisfied that the scheme for amalgamation or merger was not contrary to public interest. The basic principle of such satisfaction is none other than the broad and general principles inherent in any compromise or settlement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 held that the normal rule, namely, the principle of majority in corporate democracy or in other words, governance of the company by majority, is accepted, the appellants could not be heard to say that they had an absolute right to exercise veto power and thereby scuttle a bona fide attempt to revive a company. Efforts to keep a company from becoming insolvent and even to revive an insolvent corporate have been receiving legislative and executive support, as woul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 voting was exercised. 19. The only issue that has been raised in relation to the manner of conducting a meeting is that the ballot boxes were not sealed and the ballot boxes were not opened in the presence of the creditors present at the meeting. 20. Admittedly, the voting was evaluated by independent scrutinizers appointed by the Chairman and the said scrutinizers were officials of two prominent public financial institutions. Also, the objectors, have not been able to point out any error ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 reply to the said objection, learned counsel for the petitioner-company contended that the objection has no substance since there is no bar under section 391 to entertain and sanction the Scheme of Compromise/Arrangement. It is further submitted that section 22 of Sick Industrial Companies (Special Provisions) Act, 1985 (for short 'SICA') bars the continuation and maintainability of following proceedings against the industrial company with respect to which an inquiry is pending under section 16 or scheme is under preparation und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat 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 Companies Act are inconsistent 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 Companies Act. In my opinion the answer to this question lies in the fact whether there is any inconsistency between the said provisions of section 32 and the provisions of sections 391 to 394 of the Act which are the relevant provisions of the Act. . . ." (p. 928) "Mr. Ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 5351, relied upon the above judgment and held as under : "Reverting to the first objection taken on behalf of the intervenors that pendency of BIFR proceedings would constitute bar for entertaining the present proceedings. In my opinion this objection will have to be only stated to be rejected. Counsel for the petitioner has rightly placed reliance on the unreported decision of the Single Judge of our High Court in the case of National Organic Chemical Industries Ltd. v. NOCIL Employees Union, Company Petition No. 104 of [2005] 62 SCL 373 (Bom.) and connected case decided on 8th June, 2005. . . ." (p. 550) "I am in agreement with the view expressed by Justice S.U. Kamdar in the above decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 petition could be admitted (See para 55), the respondent filed an application before the Company Judge under rules 6 and 9 of the Companies (Court) Rules praying for a direction upon the company to execute a deed of sale in its favour in respect of the land measuring 40.45 acres relating (sic) on or on the basis of the resolution dated 25-2-2002 alleging that the same constituted a concluded contract. In the course of the hearing, it was noticed that, section 20(4) of contains introduces a non obstante clause, and this provision seeks to empower BIFR to sanction sale of assets prior to the commencement of winding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 BIFR, which was in the facts of that case, vested with the power to order the sale at a stage prior to winding up of the company. 30. Having carefully analysed the material on record, I notice that on 17-11-2005 the BIFR had declared the petitioner a Sick Industrial Company under section 3(1)(o) of SICA and appointed IFCE as the Operating Agency to devise a scheme for rehabilitation of the Company. Their Lordships of the Supreme Court in NGEF Ltd.'s case (supra) indicated (paras 39 to 46 and 49) that SICA is a complete Code in itself and being a later enactment, it would prevail over the Companies Act in case of any inconsisten ..... X X X X Extracts X X X X X X X X Extracts X X X X
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