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TMI Blog2007 (12) TMI 281X X X X Extracts X X X X X X X X Extracts X X X X ..... million five hundred ninety one thousand only) shall be converted into 0.1 per cent, non-cumulative redeemable preference shares (NCRPS), which shall be redeemed on or before March 31, 2026 and if the company is not able to redeem NCRPS the company will make fresh issue of NCRPS of the equivalent amount to the existing holders of NCRPS " the scheme of arrangement as set out in paragraph 12 of the petition in the schedule hereto between M/s. SJK Steel Plant Limited, its secured creditors and equity and preference shareholders is hereby sanctioned. - COMPANY PETITION NO. 100 OF 2007 IN COMPANY APPLICATION NO. 1160 OF 2007 AND COMPANY APPLICATION NO. 747 OF 2007 - - - Dated:- 4-12-2007 - V.V.S.RAO, J. T. Surya Satish for the Petitioner. Rajasekhara Reddy for the Respondent. JUDGMENT V.V.S. Rao, J . This company petition filed by M/s. SJK Steel Plant Limited under sections 100, 391 and 392 of the Companies Act, 1956 ("the Act", for brevity), seeks sanction of the court to the scheme of compromise/ arrangement proposed by the petitioner with their shareholders. On March 16, 1993, the petitioner-company was incorporated as Sujana Metal India Limited, as pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the secured creditors and 100 per cent, of the preference shareholders present at the meeting in person or through proxy or through corporate representatives. Pursuant thereto, the director of the petitioner-company filed the present company petition praying this court to sanction the scheme of arrangement with their shareholders. This court on September 13,2007, while admitting the petition, issued notice to the Central Government, and directed the petitioner to publish notice of hearing of company petition in two newspaper, namely, Deccan Chronicle and Vaartha. This has been complied with. On behalf of the Central Government, the RoC filed an affidavit on October 11, 2007, stating that as part of the arrangement between the secured creditors and the company, term loan to the extent of Rs. 6.00 crores will be converted into equity at par, which further provides for buy back of such equity shares allotted to the secured creditors by M/s. Kalyani Steels as per buy back agreement entered into with the secured creditors, and it is submitted that since the petitioner-company is a public company, the equity shares issued by the company are having the privilege of free transferabilit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment is fair and reasonable for them, it is not for this court to go into the pros and cons thereof and balance them. Suffice it to say that the proposed scheme of compromise/arrangement, having been approved by the shareholders, this court has to approve the proposed scheme of arrangement, as approved by the shareholders of the company, unless it contravenes any law or provisions of law or intended to defeat interest of stakeholders by fraud and misrepresentation. Before considering four objections of the Central Government, for a proper understanding, it has to be observed that the object of the scheme of arrangement proposed between the secured creditors of the company and the equitable/preferential shareholders of the company is to make the business of the company financially viable by restructuring the term loans, working capital loans and equity/preferential shares. The salient features of the scheme are as below : I Term loan : The arrangement with the secured creditors, who have given term loans aggregating to Rs. 6,373,449,246 (rupees six thousand three hundred seventy three million four hundred forty nine thousand two hundred and forty six only) envisages repayment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on proportionate basis to the repayment of TL-I subject to individual lenders having right to adjust the amount being waived as per their convenience within the overall period. III. Working Capital Terms Loan (WCTL): The company has an out standing WCTL of Rs. 543,516,384 (rupees five hundred forty three million five hundred sixteen thousand three hundred and eighty four only). The scheme provides for restructuring the same. 50 per cent, of WCTL amoun ting to Rs. 271,758,192 (rupees two seventy one million seven hundred fifty eight thousand one hundred and ninety two only) shall carry interest at 1 per cent, per annum payable monthly in 68 quarterly instalments commencing from April 1, 2011, on ballooning basis. Compromise/arrangement with equity and preference shareholders : (A) 50 per cent, of the existing equity capital aggregating to Rs. 1,873,591,000 (rupees one thousand eight hundred seventy three mil lion five hundred ninety one thousand only) shall be converted into 0.1 per cent, non-cumulative redeemable preference shares (NCRPS) to be redeemed after entire secured creditors dues are repaid as per this scheme. (B) Face Value of the balance existing equity capit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 holders is concerned, the scheme proposes to give effect to it as integral part of the scheme itself without any separate act, application, petition or deed as required under section 101 of the Act. The same does not involve either diminution or any liability in respect of unpaid share capital or payment to any shareholder of any paid up share capital and the order of the court sanctioning the scheme shall be deemed to be an order under section 102 of the Act. The company shall pass a special resolution under section 100 of the Act confirming rejection of existing equity and preferential share capital. The Central Government opposes the scheme inter alia on the ground 12 that the scheme in ways more than one is contrary to law especially section 81 ( a ) and 81 ( d ) of the Act. A scheme of arrangement which is in contravention of law cannot be sanctioned by the court. Per contra, learned counsel for the petitioner-company submits that the powers conferred on the court under sections 100 and 392 of the Act are wide enough to sanction a scheme of arrangement between the company on one side and the secured creditors and shareholders on the other side. The power is intended to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rporation and matters inconsistent thereto as well as the memorandum of association and the articles of association, cannot be said to have any effect on the powers of the court under sections 391, 392 or 394 of the Act. When the scheme of amalgamation was approved by the shareholders and creditors and the official liquidator also filed an affidavit that the affairs of the company are not conducted in the manner prejudicial to the shareholders or prejudicial to the public interest, the scheme cannot be withheld on the ground that it is hit by sections 42 and 77 of the Act. In Securities and Exchange Board of India v. Sterlite Industries (India) Ltd. [2003] 113 Comp. Cas. 273 , a Division Bench of the Bombay High Court considered, inter alia , the question whether the company court has power to grant reorganization scheme under section 391 read with sections 100 to 104 of the Act empowering the company to buy back the shares from the shareholders. A question arose as to whether the scheme sanctioned by the company court seemingly in contravention of the law can be justified. It was held therein as under (page 286): "It is well settled that under section 391 of the Compani ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hareholders were misled ; (2) the scheme when unfair to the minority shareholders represented by Miheer, ought not to have been sanctioned by the court; (3) the scheme is otherwise unfair to the equity shareholders as the exchange ratio of equity shares of transferor and transferee companies was ex facie unreasonable and unfair; and (4) Miheer represents distinct category of equity shareholders and therefore a separate meeting ought to have been convened by the company court. These four submissions were considered by the Supreme Court. A reference was made to Hindustan Lever Employees' Union v. Hindustan Lever Ltd. [1995] 83 Comp. Cas. 30 (SC) wherein it was held that a company court does not exercise appellate jurisdiction while considering a scheme of arrangement for amalgamation nor the court can ascertain with mathematical accuracy if the determination is satisfying the arithmetical test. It was also observed therein that broad and general principles in any compromise or settlement should be kept in mind while examining the scheme of arrangement. Their Lordships also considered other decisions and summarized the following principles (page 819): 1.The sanctioning court has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the view of the court there could be a better scheme for the company and its members or creditors for whom the scheme is framed. The court cannot refuse to sanction such a scheme on that ground as it would otherwise amount to the court exercising appellate jurisdiction over the scheme rather than its supervisory jurisdiction", (emphasis sup plied) Principle No. 6 is to the effect that a scheme of compromise and arrangement which is in violation of any provision of law cannot be sanctioned and the court has to first satisfy itself that any scheme of arrangement does not contravene any law or such compromise is not entered into in breach of any law. Therefore, the objections of the Central Government have to be considered in the light of the decision of Supreme Court in Mafatlal case [1996] 87 Comp. Cas. 792 (SC) ; AIR 1997 SC 506. In re objection No. 1 : The first objection of the Central Government is that conversion of preference shares with accumulated dividend thereon into FITL and waiver of preference shares on proportionate basis on repayment of term loan, is contrary to section 80(1)( a ) of the Act. Learned counsel for the Central Government submits that as per secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion can operate either by way of a lock in period in case such company offers shares to the public or transferability being permitted subject to approval of the company. In this case the secured creditors agreed to partly convert the term loan into equity capital and also agreed to sell such equity shares to M/s. Kalyani Steels. They are also given right to sell shares in the market in case M/s. Kalyani Steels goes back on its obligation. The condition in the scheme of arrangement was also agreed to by the secured creditors in the meeting convened by the chairperson appointed by this court. Therefore, there cannot be any serious objection nor such clause violates any provision of law. In re objection No. 3 : Sub-section (5A) of section 80 of the Act reads as below: "(5A) Notwithstanding anything contained in this Act no company limited by shares shall, after the commencement of the Companies (Amendment) Act, 1988, issue any preference share which is irredeemable or is redeemable after the expiry of a period of twenty years from the date of its issue." The above provision has overriding effect. As per this, after commencement of the Companies (Amendment) Act, 1996, a comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Accordingly, clause A to Chapter B of Part III shall stand modified as below : "50 per cent, of the existing equity capital aggregating to Rs. 1,873,591,000 (rupees one thousand eight hundred seventy three million five hundred ninety one thousand only) shall be converted into 0.1 per cent, non-cumulative redeemable preference shares (NCRPS), which shall be redeemed on or before March 31, 2026 and if the company is not able to redeem NCRPS the company will make fresh issue of NCRPS of the equivalent amount to the existing holders of NCRPS." In re objection No. 4 : A two fold contention is raised by learned counsel for the Central Government. Firstly, M/s. Kalyani Steels who agreed to contribute Rs. 32.00 crores by way of equity capital towards capital expenditure have not filed any undertaking to that effect and secondly promoters of the company did not file any undertaking to the effect that they would bring Rs. 18.00 crores as a part of restructuring scheme. Both these objections do not survive. The director of M/s. Kalyani Steels has filed a notarized affidavit undertaking to enter into buy back agreement with the secured creditors to buy back 60,000,000 equity shares o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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