9911796707
TMI Blog2009 (12) TMI 521X X X X Extracts X X X X X X X X Extracts X X X X ..... are necessary for the disposal of these appeals would be as follows : The petitioner-company is the parent company, viz., G. V. Films Ltd., incorporated under the Companies Act, 1956. It proposes the demerger and to form the offspring companies known as G. V. Studio City Ltd., and G. V. New Media Technologies Ltd. The main objects of the said parent company are to carry on the business as film producers (sound and/or silent), hippodrome and circus proprietors of cinema houses, theatres, concert halls and picture places and studios and also to provide for musical, dramatic and athletic performances for amusements and/or entertainment for both private and public. It also has the right of purchasing or owning, acquiring properties, lands and properties and to hotel management, acquire or lease TV channels, radio and TV stations inside or outside India and to produce Tele serials and to exhibit movies or serials or any film on satellite, internet, cablenet or any other means of communication. The said parent company's authorised sum capital as on June 30, 2007, is Rs. 20,00,00,00,000 divided into 200,00,00,000 equity shares of Rs. 10 each. The issued, subscribed and paid-up capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , and a report has been filed by the said chairman of the meeting before this court on January 30, 2008. 8. In the meeting of the equity shareholders of the petitioner-company, 787 equity shareholders exercised their votes either in person or by proxy, and the total number of votes cast were 7,86,61,306. Out of said votes cast, 689 shareholders holding 7,84,85,906 equity shares of Rs. 10 each, voted in favour of the modified scheme as proposed in the meeting. Three (3) shareholders holding 1,75,400 equity shares of Rs. 10 each, voted against the said resolution, and the remaining 95 shareholders cast invalid votes. Therefore, the petitioner had sought for approval of the scheme of arrangement as modified and approved by the equity shareholders held on January 24, 2008. 9. The further case of the petitioner would be that the proposed arrangement between the petitioner-company (parent company) and the said offspring companies will not affect the creditors both secured and unsecured. As per the orders passed by this court on November 29, 2007, in C. A. No. 3066 of 2007, the petitioner-company was directed to convene a meeting of the secured creditors of the company for the purpose o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be that they are bond holders under the deed of trust dated April 20, 2006, executed by the petitioner and respondents Nos. 1 and 2 in which the Bank of New York, London Branch, was appointed as the trustee, and the said trust deed contains terms and conditions of the bonds and the interests of respondents Nos. 1 and 2, in the issue of foreign currency convertible bonds (hereinafter referred to as FCCB) on dollars. 13. One of the important terms under which the bonds have been issued to respondents Nos. 1 and 2, is a right available to them to get the bonds converted into shares including the right available to convert them into global depository receipts (GDR). Those bonds were paid for in dollars, and the entire covenant and interest are categorised in the said deed of trust produced in annexure B of the affidavit filed by respondents Nos. 1 and 2. 14. The proposed scheme of arrangement by the petitioner would benefit only the promoters and the major shareholders of the petitioner-company, and nobody else would stand to benefit by the scheme. Without considering the terms and conditions of the bonds as per the trust deed held by respondents Nos. 1 and 2, the proposed scheme can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceive any notice of the meeting in relation to the scheme of arrangement proposed by the petitioner-company. 19. The fourth respondent was having 36,100 number of equity shares. It is also stated that the group of companies held by one G. Venkateswaran, viz., the petitioner, Sujatha Estates P. Ltd., Sujatha Films Ltd., Sujatha Productions P. Ltd., and Aruna International P. Ltd., during the year 1987 and 1990, and those group of companies claimed to have 7,80,000 equity shares of M/s. Shaw Wallace Co. Ltd., and those 7,80,000 equity shares of Shaw Wallace were taken away in an income-tax raid held in the premises of the group of companies belonging to Mr. G. Venkateswaran for the income-tax due to the tune of Rs. 380 lakhs. 20. In order to pay the income-tax arrears, the said G. Venkateswaran requested the fourth respondent to enter into an agreement of sale of shares, and it was entered into between them on November 9, 1987, under which 7,80,000 equity shares in M/s. Shaw Wallace Company which were seized by the Income-tax Department, were agreed to be purchased for a total consideration of Rs. 663 lakhs. Accordingly, the funds were arranged, and Rs. 380 lakhs tax arrears were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der the scheme of arrangement without the consent of the creditors when the liabilities of the company are sought to be transferred to its division, and therefore, if the scheme is approved without the consent of the class of creditors whose rights are also transferred and they will be vitally affected. The unsecured creditors as a whole were not consulted and thus the scheme without the approval of the creditors will be ineffective and the scheme is thus contrary to the established procedures under section 391 of the Companies Act. 22. The scheme of arrangement does not disclose material particulars like what are all the liabilities that are to be transferred to the offspring companies, viz., G. V. Studios City Ltd., and G. V. New Media Technologies Ltd., whose liabilities are sought to be transferred. It has also not disclosed the transfer of fixed assets, and thereby the creditors whose liabilities are to be discharged by the petitioner-company are deprived of the assets and what would be the recourse once the scheme is sanctioned are also not given. Therefore, the creditors are thus vitally affected by the scheme of arrangement of demerger and without approval of the class of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entered with the third respondent, would be only in the year 2012. In the meanwhile they can exercise their right to demand equity shares of any company instead of their bonds, after getting permission from the Reserve Bank of India and therefore they cannot have any objection. He would further submit that there will not be any prejudice caused to respondents Nos. 1 to 3. He would further submit that the scheme would not result in reduction of the price in conversion of FCCB bonds by its holders, since any reduction in conversion price would be informed to all the FCCB holders to get more shares. He would also submit in his argument that the fact that the erstwhile chairman of the petitioner-company is stated to have taken an advance of Rs. 380 lakhs from the fourth respondent in the year 1987 for and on behalf of his group companies towards sale of Shaw Wallace Shares held by him and his companies would show that the claim of the fourth respondent against the petitioner-company is only a speculative one. As regards the other submissions of the fourth respondent that only a portion of the said shares of M/s. Shaw Wallace were given to them and the said petitioner-company is liable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en complied with, and there was no violation of the said provisions nor any act done against public policy, and no prejudice would be caused to anybody due to demerger of the petitioner-company. The learned single judge has accepted the notional reduction of share capital to which the shareholders would not be entitled to any payment. However, the learned single judge failed to note the meeting of the unsecured creditors was not mandatory when such reduction was found only as notional one. However, respondents Nos. 1 and 2 have filed a suit before the London court exercising their right over the said bonds invoking the jurisdiction of the London courts. He would also submit that according to the agreement between the parties, eurobonds can be converted into equity shares and the said stipulation for conversion was not challenged till today, and the respondents are bound by that. He would further submit in his argument that notices have been promptly given to the creditors as per the direction of this court, and the meeting was postponed only due to the intervention of one of the secured creditors on January 23, 2008, by this court, and the petitioner was directed to get consent fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive an undertaking to the shareholders that no prejudice will be caused to them and are also ready to give an undertaking to creditors both secured and unsecured that they would jointly and severally pay the liabilities. All these reductions would be only in book adjustments and not actual loss caused to the shareholders. Since the reduction of the share capital is only notional, there will not be any prejudice to any one much less to the shareholders, who have participated and approved the scheme of arrangement and had considered their right and had accepted for the same. He would further submit that even though demerger is not contemplated under the Companies Act, it has been mentioned in the Income-tax Act under section 45, and therefore, the concept of demerger which has to be considered like that of amalgamation of companies, should have been accepted for the benefit of not only the company, but also its shareholders and the creditors. He would also cite a judgment of the Gujarat High Court reported in AIR 1970 Guj 819, in support of his case. He would further submit that the fourth respondent is not at all its creditor, and he holds negligible share, and he was also given not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have not been informed properly to the unsecured creditors and bond holders. When the monies were given by the unsecured creditors and bond holders to the petitioner-company, the petitioner-company has not informed them that due to the demerger, the benefits would go to the offspring companies but the liabilities were shown with the parent company, and how the bond holders and the secured creditors and the unsecured creditors would get their money from the petitioner parent company is not known. In the case of demerger which is diametrically opposed to amalgamation, the liabilities are with the parent company and the assets and profits are given to the offspring companies, which would affect the rights of the shareholders and creditors of the said company. Normally, the big companies are not demerging and the option of the petitioner-company to demerge is without any reason and it should be with mutual consensus from the shareholders of the company who are sharing the ownership and that the secured and unsecured creditors' consent is necessary for changing their claim from one company to another company. He would further submit that the share capital was shown to be 348,22,00,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were held by respondents Nos. 1 and 2, the petitioner-company ought to have convened a meeting of the unsecured creditors so as to avoid prejudice to any one of the parties and not to have undone the contract. Therefore, the approval of the scheme of arrangement may not be ordered, and the learned single judge is right in rejecting the claim of the appellant. 29. Learned counsel Mr. T.K. Baskar appearing for the third respondent in his argument stated that the third respondent had obtained euro bonds and he is standing on the same footing like that of respondents Nos. 1 and 2 and the reorganisation of the petitioner-company by virtue of demerger would certainly affect the rights of the third respondent, and it would be amounting to breach of contract. He would further submit that the agreement reached between the petitioner and the third respondent by virtue of the trust deed entered into between them would go to show that on maturity, the petitioner-company had agreed to pay 175 crores and because of the demerger proposed by the petitioner-company, the assets would go to the offspring companies, and how the third respondent would get his maturity amount from out of the Euro bonds ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er cent, of the bonds would be paid by the petitioner-company. It is seen that by virtue of the bonds issued by the petitioner-company, respondents Nos. 1 to 3 being foreign bodies, are having right over the petitioner-company. According to the further agreement, i.e., the trust deed, the said bonds given, at any time can be converted into shares of the petitioner-company. The hon'ble Thiru Justice K. Govindarajan (Retd) headed as a chairman, and a meeting was convened on January 24, 2008 and a report has also been filed. Similarly, yet another order was passed by this court for convening a meeting of the secured creditors to which one of the secured creditors had asked the court for postponement by filing an application in C. A. 199 of 2008, and the said meeting was postponed, and thereafter, she had settled her claim with the petitioner-company, and she had withdrawn C. A. No. 199 of 2008. The said company application was dismissed as withdrawn by order dated March 9, 2008. Thereafter, no meeting of the secured creditors was convened, and as such, it was directed by this court to get consent of the secured creditors within the stipulated time and it has been obtained by the petit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re the learned single judge. Merely because the court has passed the orders that it has been only in respect of Chennai edition, the argument that the petitioner-company had not published in all the editions all over India is not acceptable, and the participation of the limited shareholders would go to show that it has not been properly published by the petitioner-company. 36. As regards the claim of respondents Nos. 1 to 3 that they are also the creditors of the petitioner-company, and their rights have been affected by virtue of the demerger proposals, and the liability of the petitioner-company has been washed away because of the demerger, and they cannot claim the amount due under the bonds executed by the petitioner-company in case of demerger are concerned, such arguments of learned counsel for respondents Nos. 1 to 3 cannot be simply brushed aside. The liability to pay either in the form of shares at the option of the bond holders viz., respondents Nos. 1 to 3, or to repay the matured amount on maturity of those bonds would be only by the petitioner-company and if at all the liability is transferred, the same ought to have been done with the consensus of the creditors and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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 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(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(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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bers or any class of them ; The court may, on the application of the company or of any creditor or member of the company, or, in the case of a company which is being wound up, of the liquidator, order a meeting of the creditors or class of creditors, or of the members or class of members, as the case may be, to be called, held and conducted in such manner as the court directs : . . . Provided that no order sanctioning any compromise or arrangement shall be made by the court unless the court is satisfied that the company or any other person by whom an application has been made under sub-section (1) has disclosed to the court, by affidavit or otherwise, all material facts relating to the company, such as the latest financial position of the company, the latest auditor's report on the accounts of the company, the pendency of an}' investigation proceedings in relation to the company under sections 235 to 251 and the like." 42. It is true that respondents Nos. 1 to 3 are FCCB holders with the petitioner-company, and the value of the bonds should have been paid by the petitioner-company on maturity. Indisputably, they are coming under the class of unsecured creditors. Any compromise b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entioned in the said bill were only the place of editions of the said The Hindu Business Line newspaper. Even though the said publication was ordered by the court, the petitioner-company should have asked for paper publication for effective information to its shareholders. The petitioner-company was not prevented from seeking permission from the court to convene a meeting with the unsecured creditors whose rights are also prejudiced due to the demerger of the petitioner-company. It is also brought to the notice of this court that the demerger would tantamount to transfer of assets of the petitioner-company as per the definition of demerger under section 391 of the Companies Act. The definition of merger would be thus according to section 2(19AA) of the Income-tax Act : "2. (19AA) 'demerger', in relation to companies, means the transfer, pursuant to a scheme of arrangement under sections 391 to 394 of the Companies Act, 1956 (1 of 1956), by a demerged company of its one or more undertakings to any resulting company in such a manner that- (i)all the property of the undertaking, being transferred by the demerged company, immediately before the demerger, becomes the property of the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transfer. Therefore, the right and liabilities of the unsecured creditors should also have been cared by the petitioner-company by taking appropriate steps in accordance with law. Otherwise, the rights of the said class of creditors would be jeoparadised or prejudiced by demerger of the petitioner-company. 45. It has also been argued by the respondents that the petitioner-company must show with authentic proof that there would not be any prejudice. Even at the appellate stage, they have not produced any proof of accounts. However, the balance-sheet of the petitioner-company as derived from the website of the company in the internet has been produced by respondents Nos. 1 and 2. The net profit shown as per the account ending with March 31, 2007, was shown to be Rs. 17,59,70,000 whereas it was found to be Rs. 1,21,19,000 for the year ending with March 31, 2008. It deteriorates with a loss of Rs. 119,15,19,000 for the year ending with March 31, 2009. The said accounts/ balance-sheet would clearly depict that the result of demerger which is very much detrimental to the parent company, viz., the petitioner-company, and the liabilities of the company attached with the parent company to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... meetings of the concerned were duly held and conducted, that the scheme was accepted by a competent majority, that it was for a common advantage, reasonable, prudent and proper in every aspect, were mandatory. (ii)That, moreover, the company had not placed before the court its authenticated latest financial position, as required under sub-section (2) of section 391 of the Companies Act, 1956. (iii)That, on the facts, the banks' apprehension that the merger would jeopardise their claims was justified, and sanction had to be refused." 49. Following the said judgment, this court in an earlier occasion, found in O.S.A. Nos. 55 to 68 of 2003 between the Ramco Super Leathers Ltd. v. Dhanalakshmi Bank Ltd. [2009] 152 Comp Cas 437 (Mad), came to a conclusion as follows (page 455) : "Though no specific provision has been made for ascertaining the wishes of the creditors in a scheme of arrangement between the company and its members, the court is entrusted with the duty to ascertain whether the scheme would affect the interest of the creditors to such an extent that the holding of their meeting is essential, and if the court in appraisement of the facts and circumstances is of the view t ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
