9911796707
TMI Blog2007 (12) TMI 281X X X X Extracts X X X X X X X X Extracts X X X X ..... ifty crores) equity shares of Rs. 10 each and 5,00,00,000 preference shares of Rs. 100 each. These are issued, subscribed and paid-up to the extent indicated in the petition. The main objects of the petitioner-company are to produce, manufacture, purchase, refine, import, export, sell and to deal in naturally occurring ores and agglomerated iron ores, sponge iron, pig iron, grey iron, alloy iron, ductile iron, SG iron, malleable iron and special iron and steel in all forms anchor by-products thereof etc., as mentioned in the affidavit annexed to this petition. The petitioner proposed a scheme of arrangement with its secured creditors and shareholders. The board of directors of the petitioner-company in their meeting held on December 21, 2006, unanimously approved the scheme of compromise/arrangement between the petitioner and its shareholders. In pursuance thereof, the petitioner filed an application, being C.A. No. 747 of 2007, wherein this court by an order dated April 19, 2007, appointed Sri M. S. Rama Chandra Rao, advocate, as the chairperson to convene the meeting of the equity shareholders, preference shareholders and the secured creditors of the petitioner-company at its re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act. As per arrangement, the loan will be considered only as contingent liability, which is also having clause of waiver of the fund if the term loan is fully repaid by the company to the secured creditors. The preference shares can be redeemed only in the manner prescribed under the abovementioned proviso otherwise the company has to comply with the requirement of proviso (d) of the said section. It is further averred that 50 per cent, of the existing equity capital aggregating to Rs. 1,87,35,91,000 shall be converted into 0.1 per cent, non-cumulative redeemable preference shares (NCRPS) to be redeemed after the entire secured creditors due is repaid as per the scheme, that the entire secured creditors will be repaid only in the financial year 2028. Thus, repayment period starts in 2028 or thereafter, which is beyond maximum time limit of 20 years prescribed. Such clause is contrary to the provisions of section 80(5A) of the Companies Act, 1956. In reply to the affidavit filed by the RoC, the petitioner filed an affidavit disputing validity of the objections raised by the RoC. The petitioner contends that although the petitioner-company is a closely held limited company, it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs. 60,000,000 (rupees sixty million only) at par after de-rating of the existing equity shares as per the scheme and allotting the existing equity shares to the secured creditors on pro-rata basis. If the secured creditors are not willing to take the existing equity shares, it shall be governed by a special provision in the scheme. Such a provision postulates that M/s. Kalyani Steels Limited shall enter into buy-back agreement with the secured creditors for buy-back of equity shares held by them or as and when called upon by the secured creditors to do so, any time after three years from "cut off date" at a price, which should give yield of 14 per cent, per annum or market price, whichever is higher. In the event of M/s. Kalyani Steels Limited not honouring obligation the secured creditors shall have the right to dispose of the shares through the market. The balance term loan of Rs. 3,126,724,623 (rupees three thousand one hundred twenty six million seven hundred twenty four thousand six hundred and twenty three only), (TL-II), shall carry interest at 1 per cent. per annum payable monthly in 68 quarterly instalments commencing from April 1, 2011, on ballooning basis, namely, 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count. The utilization of the securities premium account shall be with the prior approval of the majority of the secured creditors. Upon the effective date and in consideration of the aforesaid de-rating 9 of existing equity capital, the existing equity shares, shall without further act, application or deed, be deemed to have been cancelled and in lieu thereof for every 100 existing equity shares held by the members of the company, the company shall allot 50 (fifty) - 0.1 per cent, non-cumulative redeemable preference shares of Rs. 10 each and 16 (sixteen) equity shares of Rs. 10 each: (a)The new equity and preference shares to be issued and allotted in terms hereof will be subject to the memorandum and articles of association of the company. (b)The existing share certificate (s) held by the shareholders of the company, shall be required to be surrendered to the company and in lieu thereof the company shall deliver new equity and preference share certificate (s). (c)The existing equity shares held in electronic form shall stand auto matically cancelled and the requisite number of new equity and preference shares shall be issued in the same electronic form by the company. Exist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ary question is whether a scheme of arrangement proposed by the company cannot be sanctioned under sections 391 and 392 read with section 100 of the Act. In the opinion of this court, the question is no more res integra by reason of the decision of the Supreme Court in Miheer H. Mafatlal v. Mafatlal Industries Ltd. [1996] 87 Comp. Cas. 792 (SC); AIR 1997 SC 506(hereinafter referred to, as "Mafatlal case"). In PSI Data Systems Ltd., In re [1999] 98 Comp. Cas. 1 (Ker.) dealing with the question whether there was any violation of section 80(1) of the Act in the scheme of arrangement, it was held (page 2): "The provisions contained in section 80(1) are to protect the preferential shareholders and their interests from any unilateral action of the company and the equity shareholders. When the company unilaterally, without the participation of the preferential shareholders, decided to redeem their stake, naturally, it shall be in terms of section 80(1) of the Companies Act and not otherwise. An arrangement under section 80(1) shall be without the participation, knowledge and consent of the preferential shareholders. In this case, the meeting of the preferential shareholders was held and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ically enjoins the following of a special procedure prescribed for reduction of share capital." In T.C.I. Industries Ltd., In re [2004] 118 Comp. Cas. 373 this court laid 17 down that while exercising powers under sections 391 and 394 of the Act the court cannot sit in appeal over the decision arrived at by the shareholders or the secured creditors or the unsecured creditors, and minutely examine whether the proposed scheme as approved by the shareholders should be sanctioned or not. The ratio in the decisions referred to herein above is that unless a company 18 resorts to an unilateral action detrimental to equity/preferential shareholders, nothing prevents the court from sanctioning the scheme of arrangement under section 391 of the Act. None of the decisions lay down that the court can sanction a scheme of arrangement even when such a scheme contravenes the provisions of the Companies Act or in breach of procedure contemplated by the Act. This position is well settled by reason of the decision of the Supreme Court in Mafatlal case [1996] 87 Comp. Cas. 792 (SC); AIR 1997 SC 506. In Mafatlal case [1996] 87 Comp. Cas. 792 (SC); AIR 1997 SC 506, scheme of amalgamation between Maf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cision 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 the necessary material indicated by section 391(1)(a) is placed before the voters at the concerned meetings as contemplated by section 391(1). 5.That all the requisite material contemplated by the proviso to sub- section (2) of section 391 of the Act is placed before the court by the concerned applicant 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 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 be, were acting bona fide and in good faith and were not coercing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are liable to be redeemed", at the option of the company. The proviso (a) to sub-section (1) of section 80, lays down modalities in case preference shares are redeemed. Nowhere Section 80 prohibits conversion of the preference shares into a loan. It is nobody's case that the preference shares shall be redeemed on repayment of term loan No. 1. Indeed learned counsel for the petitioner submits that preference shares are not being redeemed but are being converted into FITL and the term loan availed by the company shall stand waived on repayment of term loan No. 1. He also submits that preference capital is not waived and its nature is changed to a loan. Therefore, the objection of the Central Government cannot be sustained. In re objection No. 2 : It is submitted by learned counsel for the Central Government that the term loan extended by the secured creditors to an extent of Rs. 6,00,00,000 is being converted into equity shares with condition to the effect that such shares shall be transferred to M/s. Kalyani Steels after a period of three years and thus privilege of free transferability of shares in a public limited company is restricted which is not permissible in law. Per contra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ference to clause A of Chapter B which reads 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) to be redeemed after entire secured creditors' dues are repaid as per this scheme." The scheme provides for payment of dues to the secured creditors in 2028. By necessary corollary 50 per cent, of equity capital which is converted into 0.1 per cent. NCRPS will be redeemed in the year 2028 or thereafter, i.e., beyond the period of twenty years after repayment of entire dues to the secured creditors. Any such issue of preference shares redeemable after twenty years is prohibited by section 80(5A) of the Act. Therefore, if the existing clause is allowed as such it would certainly contravene the provisions of the Act and goes against the ratio laid down by the Supreme Court in Mafatlal case [1996] 87 Comp. Cas. 792 (SC); AIR 1997 SC 506. Initially, learned counsel for the petitioner made a strenuous effort to submit that even if NCRPS are redeemed after a lapse of twen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l supplied by M/s. Kalyani Steels. This is not seriously disputed by learned counsel for the Central Government. In so far as additional contribution of Rs. 18.00 crores by the promoters is concerned, in the reply affidavit filed by the director of the petitioner-company, it is averred that the promoters have already brought in the interest free unsecured loan of Rs. 18.00 crores towards capital expenditure on March 15, 2007. Clause 28 to Part VI of the scheme under consideration contains list of defects. Inter alia it is provided that the secured creditors shall have the right to reverse the waivers/sacrifices provided under the scheme in the event of defaults by non-induction of M/s. Kalyani Steels as the majority stakeholders and/or non-fusion of funds to the extent of at least Rs. 18.00 crores as interest tree unsecured loan. In view of this, the objection of the Central Government is unsustainable. In the result, on condition of modifying clause A to chapter B of Part III of the scheme of arrangement as indicated hereinabove while considering objection No. 3, the scheme of arrangement as set out in paragraph 12 of the petition in the schedule hereto between M/s. SJK Steel Pl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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