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TMI Blog2009 (12) TMI 521X X X X Extracts X X X X X X X X Extracts X X X X ..... scheme of arrangement by the learned single judge is in order, and we are unable to see anything to disturb the finding of the learned single judge. Appeal dismissed. X X X X Extracts X X X X X X X X Extracts X X X X ..... anies. For that purpose, hon'ble Mr. Justice K. Govindarajan (Retd.) was appointed to act as a chairman of the said meeting and to report the results thereof. 6. Accordingly, a meeting of the equity shareholders was convened as per the requirements made in section 396 of the Companies Act, 1956, and each of the equity shareholders of the company were informed through certificate of posting, and a notice was also advertised in the English daily The Hindu Business Line on December 29, 2007 and in Tamil daily Malai Murasu on December 29, 2007, as per the directions of the court. Accordingly, on January 24, 2008, the meeting of the shareholders of the petitioner-company was duly convened in accordance with the said order of this court at New Woodlands Hotel P. Ltd., Nos. 72-75, Dr. Radhakrishnan Salai, Mylapore, Chennai-600 004, and hon'ble Mr. Justice K. Govindarajan (Retd) presided over the said meeting. 7. In the said meeting of the equity shareholders, some modification was proposed in clause 2 of section 1 of Part IV of the scheme and the said amendment was duly approved, and a report has been filed by the said chairman of the meeting before this court on January 30, 2008. 8. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s court was redundant, the court granted four weeks' time to the petitioner-company to get consent from other secured creditors. Accordingly, consent of three secured creditors, viz., Citi Bank, State Bank of India and the Lakshmi Vilas Bank Ltd., were obtained for the proposed scheme of arrangement, and they also submitted their consent for the said scheme. The proposed scheme of arrangement would take effect from July 1, 2007, the appointed date, under the provisions of sections 391 to 394 of the Companies Act, 1956. The scheme of arrangement will be beneficial to all the companies involved in the scheme, including the shareholders of the said companies. Therefore, the petitioner-company prays for the scheme of arrangement between G. V. Films Ltd. (parent company) and G. V. Studio City Ltd., and G. V. New Media Technologies Ltd. (offspring companies) enclosed with the said petition, be sanctioned by this court with effect from July 1, 2007, so as to combine all the shareholders and creditors of the petitioner-company. 12. The contention of respondents Nos. 1 and 2 would be that they are bond holders under the deed of trust dated April 20, 2006, executed by the petitioner and res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dised by this scheme and arrangement. The petitioner-company had deliberately moved the said application only for convening the meeting of the secured creditors knowing fully well that it would not be in a position to obtain consent of respondents Nos. 1 and 2 and other unsecured creditors. Since no meeting of the secured creditors was held as per the directions of this court also, the scheme of arrangement cannot be approved. Therefore, the proposed scheme of arrangement being a dubious one may not be approved by the court. 17. The third respondent had also raised similar contentions in his affidavit. According to him, a similar deed of trust was entered into by the petitioner-company with the third respondent on October 23, 2006, in which the Bank of New York, London Branch, was appointed as the trustee under the trust deed. The said FCCB was in the form of euro bonds. The third respondent has also raised objections similar to that of the objections of respondents Nos. 1 and 2. 18. The fourth respondent had stated in his objections that he being a shareholder, did not receive any notice of the meeting in relation to the scheme of arrangement proposed by the petitioner-company. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the petitioner-company and four other companies. Therefore, the fourth respondent would thus become a creditor having shares of the shareholders as pledgee of the petitioner-company. The scheme of arrangement as proposed by the petitioner would certainly affect all the creditors including the fourth respondent. The proposed scheme of arrangement is violative of provisions of law and also contrary to public policy. The fourth respondent would come as one of the secured creditors, and the direction of the court: to convene a meeting of the secured creditors on January 24, 2008, at 10.30 a.m., was not informed to the fourth respondent. The non-participation or the non-conduct of the said meeting of the secured creditors of the company would vitally affect the decision relating to the scheme of arrangement. Even assuming that the fourth respondent is not a secured creditor, but only an unsecured creditor, meeting of the unsecured creditors of the company was not convened which is fatal to the approval of the scheme. 21. The petitioner cannot seek demerger of the companies under the scheme of arrangement without the consent of the creditors when the liabilities of the company are sou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, by the learned single judge is contrary to all canons of law when the scheme of demerger was approved by an overwhelming shareholders present and all secured creditors of the company have given assent. He would further submit in his argument that the demerger proposed by the petitioner is not a transfer since the group of companies would face the liabilities as that of the parent company. He would further submit that the learned single judge failed to appreciate the basic fact that three objectors, viz., 3 FCCB holders, respondents Nos. 1 to 3, are not at all prejudiced and will not be worse off by sanctioning the scheme of demerger in view of the readiness and willingness expressed by all the three companies (parent company and offspring companies) to jointly and severally continue to shoulder all the obligations under the FCCBs by executing a supplementary trust deed as contemplated in the FCCB conditions. He would further submit in his argument that even otherwise the maturity of those bonds either dollar bonds entered with respondents Nos. 1 and 2 or the euro bonds entered with the third respondent, would be only in the year 2012. In the meanwhile they can exercise their ri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would depict the intention of the shareholders who are the owners of the company. Demerger as a scheme is possible, and there is no impediment for granting approval, since the three secured creditors have also given their consent for the said scheme. He would also submit that the objections of FCCB holders are also not sustainable because they can at any time change the hands of those bonds, and the condition that they should have consulted for the demerger of the petitioner-company is not necessary, and the basic conditions in the trust deed would be that of contractual relationship, and if at all they would be entitled to the said amount of conversion on maturity in the year 2012 and they cannot preclose the said bonds nor oppose the demerger of the company which is inter se. It can be objected only by the shareholders of the company to which a prompt meeting was held as per the orders of this court on January 24, 2008 and the majority of the shareholders approved the scheme with modification. He would also submit that the requisites of section 391 of the Act have also been complied with, and there was no violation of the said provisions nor any act done against public policy, an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... their option to convert the bonds into shares, and therefore, they would not be termed as shareholders, and their bonds would mature only in the year 2012, and therefore there cannot be any objection nor any prejudice caused to respondents Nos. 1 to 3 by virtue of approval of the scheme of arrangement. He would cite a judgment of the hon'ble apex court reported in [1996] 87 Comp Cas 792 ; AIR 1997 SC 506 between (Miheer H. Mafatlal v. Mafatlal Industries Ltd.), in support of his case. The scheme contemplates reduction of capital and the issued unpaid capital has not been reduced. The shares reduced are allotted to offspring companies demerged from the parent company, and therefore there cannot be any prejudice to the shareholders nor the creditors. He would also submit that unless the bond holders, viz., respondents Nos. 1 to 3 opted for conversion, the petitioner cannot itself convert them into shares, and therefore, there is no question of any prejudice caused to respondents Nos. 1 to 3. However, he would submit in his argument that all the three companies are ready to give an undertaking to the shareholders that no prejudice will be caused to them and are also ready to give an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should have been produced atleast at the appellate stage. He would cite a judgment of the hon'ble apex court reported in [1996] 87 Comp Cas 792 ; AIR 1997 SC 506 (Miheer H. Mafatlal v. Mafatlal Industries Ltd.) for the said principle. He would further submit in his argument that nothing is mentioned in the scheme of arrangement about the liability to pay the creditors either secured or unsecured or the bond holders out of which they could exercise their right. The scheme of arrangement without any meeting of the secured and unsecured creditors is a calculated fraud to deceive the shareholders and creditors. He would also submit that the argument advanced before the learned single judge that the advertisement for the convening of the shareholders meeting was done only in The Hindu Business Line of Chennai edition and not in country wide editions. He would also submit that out of 85,540 shareholders, 787 shareholders only attended the meeting since there was no proper publication. He would further submit that the shares of the petitioner-company are throughout India, and they have not been informed properly to the unsecured creditors and bond holders. When the monies were given by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the scheme of arrangement. He would further submit that as per the letter of offer issued by the petitioner-company to respondents Nos. 1 and 2, the promise given by the petitioner-company was that 140 per cent, of the value of the bonds will be given at the time of maturity. In such circumstances, he would further submit that the bond holders would be very much concerned about the assets, out of which the money could be paid to the bonds held by respondents Nos. 1 and 2. He would further submit that once demerger had taken place, the petitioner-company would not get assets since demerger is a transfer under section 2(19)(AA) of the Income-tax Act. The argument advanced by the appellant that demerger was not a transfer is not correct and therefore undertaking given by all the companies and group of companies will not serve the purpose, and prejudice would be caused to the respondents creditors. As per section 62 of the Indian Contract Act, 1872, by mutual consent, contract could be done and when the liability cannot be changed by the debtor and especially when the FCCB were held by respondents Nos. 1 and 2, the petitioner-company ought to have convened a meeting of the unsecure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eached by the learned single judge that the scheme of arrangement proposed by the petitioner-company cannot be approved since it is in violation of the statutory provisions and prejudicial to the shareholders as well as the secured creditors of the company would be sustainable or not. 32. As far as the present cases are concerned, the admitted facts would be that the petitioner-company was in existence as per the incorporation under the Companies Act, 1956 and respondents Nos. 1 and 2 have purchased dollar bonds as per the offer circular given by the petitioner-company and the trust deed entered into between them and the said dollar bonds to the said value were still possessed by respondents Nos. 1 and 2, and their maturity value is in the year 2012. Similarly the third respondent had obtained euro bonds to the value mentioned in the offer circular as well as trust deed entered into between them which would also be in existence for its maturity till 2012. It has been categorically agreed by the petitioner-company and respondents Nos. 1 to 3 that the maturity value of 140 per cent, of the bonds would be paid by the petitioner-company. It is seen that by virtue of the bonds issued b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions only some of the cities of our country, and it is not mentioned therein that it was made in all the editions throughout India. The said bill would disclose that it has been published in the editions of New Delhi, Bombay, Calcutta, Bangalore and other cities, and it never said that throughout India. Therefore, it cannot be taken as that it was published throughout India and by virtue of the publication, every one of the shareholders would be presumed to have been informed. 35. It is an admitted fact that the fourth respondent is holding 38,100 shares in the petitioner-company. He has categorically mentioned that he was not served with any notice and he had not attended the meeting conducted on January 24, 2008. Since the petitioner has not produced any proof that it has served notice properly on the fourth respondent, the submission that 787 shareholders attended the meeting and it was an overwhelming one cannot be accepted. The further submission of the petitioner-company that the fourth respondent is possessing only lesser extent of shares was not a point raised before the learned single judge. Merely because the court has passed the orders that it has been only in respect o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds and they are coming under the category of creditors, and they would be certainly affected if liabilities are transferred to the offspring companies without the consent of the respondents or the liability alone are kept with the parent company, and the assets have been transferred to the offspring companies. Such a transfer of assets detnmental to the unsecured creditors would be certainly amounting to act of prejudice. The obligation cast upon the petitioner-company under the trust deed entered into between the petitioner-company and respondents Nos. 1 to 3 should not have been breached or violated by the scheme of arrangement proposed by the petitioner-company. 38. In this behalf, learned counsel for respondents Nos. 1 and 2 cited a judgment of the hon'ble apex court in Miheer H. Mafatlal v. Mafatlal Industries Ltd. reported in [1996] 87 Comp Cas 792 ; AIR 1997 SC 506, explaining the scope of court while dealing with the amalgamation 5cheme. The apex court considering various judgments have indicated the scope as follows (page 819 of 87 Comp Cas) : "(1) The sanctioning court has to see to it that all the requisite statutory procedure for supporting such a scheme has been comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Moreover, it should not be violative of any provisions of law and not opposed to public policy. 40. In the aforesaid circumstances, the approval of the scheme could be done only in case of majority resolution passed by the shareholders. However, the report of the chairman would go to show that there were some objectors in the meeting and the said opposition was negligible. Therefore, there is no question of any unanimous approval. 41. As far as the requisites of the statutory provisions contemplated under section 391 are concerned, for better understanding section 391 has to be extracted as follows : "Section 391 of the Companies Act deals with power to compromise or make arrangement with creditors and members. Sub-section (1) and its proviso reads as follows : (1) Where a compromise or arrangement is proposed-- (a)between a company and its creditors or any class of them; or (b)between a company and its members or any class of them ; The court may, on the application of the company or of any creditor or member of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f approval of demerger. The violation of section 62 of the Indian Contract Act is also warranted. It is also brought to the notice of this court that the proposed demerger programme involves reduction of capital of the company, and in such circumstances, the procedure prescribed under the Act, viz., sections 100 to 104 of the Act, should have been followed. It is categorically mentioned that no specific resolution has been passed for reduction of capital by the petitioner-company nor any such resolution has been produced. 43. As already pointed out, the service of notice to the shareholders for the meeting held on January 24, 2008, is not adequate and the certificate of posting issued to the fourth respondent who is holding nearly 38,100 shares, will not serve the purpose, and no proof has been filed in that regard. The recent production of bill from The Hindu Business Line would only depict certain towns of the country and it does not mention all editions issued from important cities from all over the country. No other documents have been produced to show that the cities mentioned in the said bill were only the place of editions of the said The Hindu Business Line newspaper. Even ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Explanation 1.--For the purposes of this clause, 'undertaking' shall include any part of an undertaking, or a unit or division of an undertaking or a business activity taken as a whole, out does not include individual assets or liabilities or any combination thereof not constituting a business activity. Explanation 2.--For the purposes of this clause, the liabilities referred to in sub-clause (ii) shall include-- (a)the liabilities which arise out of the activities or operations of the undertaking ; (b)the specific loans or borrowings (including debentures) raised, incurred and utilised solely for the activities or operations of the undertaking; and (c)in cases, other than those referred to in clause (a) or clause (b), so much of the amounts of general or multipurpose borrowings, if any, of the demerged company as stand in the same proportion which the value of the assets transferred in a demerger bears to the total value of the assets of such demerged company immediately before the demerger." 44. As per the aforesaid definition, the demerger of the company would amount to transfer. Therefore, the right and liabilities of the unsecured creditors should also have been cared by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eal preferred by the petitioner-company before a Division Bench in O. S. A., was also dismissed, and the suit is pending for his claim. Whether the fourth respondent is an unsecured creditor, who is entitled to the claim made in the suit or not is to be decided in the suit. In the mean while, he could be considered as a shareholder and his objection should have been heard. In the event of his claim in the suit being decreed in his favour, he would also be prejudiced by the act of demerger. The said stand taken by the fourth respondent cannot be brushed aside since he would also be affected in the event of the liability mounting with the petitioner-company and the assets have been transferred to the offspring companies. 48. In the aforesaid circumstances, the decision of the hon'ble Bombay High Court reported in [1995] 82 Comp Cas 437 (Bharat Synthetics Ltd. v. Bank of India), is as follows (headnote) : "(i)that undisputably no meeting of the creditors and shareholders had been held, nor consent of the requisite number of creditors, obtained. The requirements, such as that the meetings of the concerned were duly held and conducted, that the scheme was accepted by a competent major ..... X X X X Extracts X X X X X X X X Extracts X X X X
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