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TMI Blog2003 (8) TMI 562X X X X Extracts X X X X X X X X Extracts X X X X ..... ctors have passed resolutions approving the said scheme of arrangement. Petitions were filed in this Court under section 391(1) of the Companies Act and this Court by order dated February 11, 2003 was pleased to direct the companies to convene separate meetings of its equity shareholders, preference shareholders, secured creditors and unsecured creditors for the purpose of considering and, if thought fit, approving the said scheme of arrangement with or without modification. Meetings of the equity shareholders, preference shareholders, secured and unsecured creditors were held in terms of the orders of this Court. After the aforesaid meetings were held the Chairperson has submitted his report which is placed on record. It is reported that in compliance with the provisions of section 391 of the Companies Act the scheme of arrangement has been approved in those meetings. Thereafter, the companies have filed the present petitions for sanction of the scheme under section 391(2) read with section 394 of the Companies Act. Notice of these petitions were duly served on the Regional Director, Department of Company Affairs, Kanpur. Notice was also advertised in the newspapers in compliance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unjab, which commenced its commercial production from the month of February 1999. During the aforesaid period from 1996 to 1999, the company incurred heavy losses resulting in a large debt burden consequent to which in October 1999 the company and the financial institutions agreed for restructuring of the debt without the intervention of the Court. However, despite the aforesaid restructuring the company continued to face financial problems. 4. It is the further case of the petitioners that as on September 30, 2002, the principal amount of long term debt due to financial institutions/banks are ₹ 211.03 crores which remained at the same level as on December 31, 2002. Besides the working capital lenders had also advanced ₹ 98.13 crores which, however, due to some repayment came down to ₹ 45.75 crores by December 31, 2002. As the Reserve Bank of India issued guidelines for corporate debt restructuring, the Siel Limited decided to propose t at its corporate debt should be restructured and accordingly the aforesaid scheme of arrangement was propounded. In the said scheme it was proposed that Siel Limited would be demerged/hived off into four units, namely, Shivajima ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assets of the company, namely, investment in shares which is also held to be non-performing assets, have been assigned to Siel Holdings Ltd. which is also made to be a self liquidating company. The said shares have been valued at ₹ 35 crores and an equivalent amount of debt, i.e., ₹ 35 crores have been assigned to Siel Holdings Ltd. (g) The sugar business would be spun off and vested in Siel Sugar Limited. The shareholders of Siel Ltd. shall be allocated shares in the Siel Sugar Limited in proportion of three shares in the new company for every four shares held in Siel Ltd., and (h) The petitioner company, i.e., Siel Ltd., would continue to operate with the residual business, i.e., Chemicals and vegetable oil. 5. According to the petitioners, by the aforesaid restructuring the non-performing assets of an estimated value of ₹ 100 crores would be liquidated and an equivalent amount of debt would be discharged, and from the operations of Siel Ltd. and Siel Sugar Limited, the remainder of debt would be discharged over a period of seven years. It is contended on behalf of the petitioners that delinking and sequestering non-performing assets, vesting them in self li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as in case of UTI only principal is shown which is also less. 2. We as NCD holders are at least more than 64% of total NCD of the company. Hence, we should be treated as separate class of creditors. We form majority of NCDs and we do not agree to this scheme of arrangement. 3. That SOA is not acceptable to us as all the three packages involve considerable sacrifices, which do not suit our business and regulatory environment. We would like our dues to be settled through a OTS which should not be linked to sale of assets. '' The said ballot paper, however, clearly indicates that the U.T.I. had voted against the resolution. In the ballot paper given to the State Bank of India it was found by the Chairperson that the State Bank of India had voted for the resolution but a letter dated March 13, 2003 addressed to the Chairperson was found attached along with the ballot paper. However, the minutes of the meeting record that at the meeting no mention of the said letter was made by the State Bank of India nor any issue was raised and, Therefore, as the State Bank of India had ex facie voted for the resolution the aforesaid vote was counted as a valid vote and in favor of the resolut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... like Unit Trust of India, which is a financial institution, constitute a separate and distinct class? Whether there is no uniformity or similarity of interest between them and the other secured creditors as their rights a e distinct as envisaged in the Trust Deed? 2. Whether the objector UTI having held 64% of the total non-convertible debentures, a separate meeting for the UTI was to be held as it constitutes a separate and distinct class from other debenture holders as interest in their case was not funded and as UTI had sought for one time settlement? . 3. Whether 3/4th of the value of the creditors and members had not voted in favor of the scheme and, if so, its effect? 4. Whether holding of meeting and including working capital providers in the said meeting held for the secured creditors, is illegal? 5. Whether the share exchange ratio propounded by the company under the scheme is unjust and improper? 6. Whether the latest balance sheet and latest financial position was not disclosed by the company? 7. Whether all relevant materials were not disclosed by the company along with the notice sent to the members and the creditors? 8. Whethe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g for the objector relied upon the ratio of the decision in Miheer H. Mafatlal v. Mafatlal Industries Ltd, (1996) 87 Comp Cas 792, and also on the decision in Re Hawk Insurance Co. Ltd, (2001) 2 B C L C 480. Mr. Chidambaram and Mr. Chandhiok appearing for the company also relied upon the same decisions while refuting the submissions made by the counsel appearing for the objector on the aforesaid score. In addition, counsel for the petitioner also relied upon the decision of the Bombay High Court in Wipro Finance Ltd. v. Suman Motels Ltd, (2002) 10 Comp 549, and the decision of the Gujarat High Court in Arvind Mills Limited, (2002) 4 Comp L J 273. With the aforesaid issue which is raised, another issue which is closely connected is the submission of the objector UTI contending inter alias that a non-convertible debenture holder is distinct from other debenture holders and, Therefore, a separate treatment was to be given to the UTI making them separate from other debenture holders particularly when in the present case interest in the case of UTI was not funded and as the UTI had sought for one time settlement in view of which the UTI stood as a distinct and separate class from other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terial 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 any investigation proceedings in relation to the company under section 235 to 251, and the like. (3) ............'' 14. A reading of the aforesaid provision would make it amply clear that that where different terms are offered to different class of creditors under the proposed compromise or arrangement, then in that event a separate class could be said to be constitute in respect of each class of creditors or shareholders and in that event separate meetings are to be held for such different class of creditors. If the creditors do not have a commonality of interest and if their rights and interest under a compromise could have different effect, they are to be separately treated and cannot be included into one class. Those who are offered substantially different compromise have to be treated separately and differently. Even if there are different groups within a class, and their interests are different from the rest of the class, they are to be treated differently as forming a separate class. A g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore this Court initially contending inter alias that it could not have been included within the ambit of the class of the secured creditors as it constituted a distinct and separate class. The classification of members or creditors can be founded on he basis of difference in the terms offered under the scheme. The difference in terms of the scheme can only be the criterion for identifying class for the purpose of convening a separate meeting of such class. In this connection, a reference may be m de to the decision of the Supreme Court in Miheer H. Mafatlal (supra) where the Supreme Court has said as follows:- '' In view of the aforesaid settled legal position, Therefore, the scope and ambit of the jurisdiction of the company Court has clearly got earmarked. The following broad contours of such jurisdiction have emerged:- . (1) The sanctioning 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 section 391(2). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The aforesaid parameters of the scope and ambit of the jurisdiction of the company court which is called upon to sanction a scheme of compromise and arrangement are not exhaustive but only broadly illustrative of the contours of the court's jurisdiction. . . In the said decision the Supreme Court proceeded to hold as follows:- . ''.......... On the express language of section 391(1) it becomes clear that where a compromise or arrangement is proposed between a company and its members or any class of them a meeting of such members or class of them has to be convened. This clearly pre-supposes that if the scheme of arrangement or compromise is offered to the members as a class and no separate scheme is offered to any sub-class of members which has a separate interest and a separate scheme to consider, no question of holding a separate meeting of such a sub-class would at all survive. Even otherwise, it becomes obvious that as minority shareholder if the appellant had to dissent from the scheme his dissent representing 5% equity shareholding would have been visible both in a separate meeting, if any, of his sub-class or in the composite meeting where also his 5% dissent w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ho will all be willing to be bound by the scheme. In that case it is not the practice to hold a meeting of that class, but to make the class a party to the scheme and to obtain the consent of all its members to be bound. It is, however, necessary for at least one class meeting to be held in order to give the court jurisdiction under the section.'' . It is, Therefore, obvious that unless a separate and different type of scheme of compromise is offered to a sub-class of a class of creditors or shareholders otherwise equally circumscribed by the class no separate meeting of such sub-class of the main c lass of members or creditors is required to be convened. On the facts of the present case the appellant has not been able to make out a case for holding a separate meeting of the dissenting minority equity shareholders represented by him.......'' 15. In Re. Hawk Insurance Co. Ltd (supra) it was held as follows:- . ''[12] It can be seen that each of those stages serves a distinct purpose. At the first stage the court directs how the meetings are to be summoned. It is concerned, at that stage, to ensure that those who are to be affected by the compromise o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lt together with a view to their common interest. It the rights of those creditors whom the scheme is intended to bind are such as to make it impossible for them to consult together with a view to their common interest, then the scheme must be regarded as a number of linked arrangement . In the latter case it will be necessary to have a separate meeting of each class of creditors; a class being identified by the test that the rights of those creditors within it are not so dissimilar as to make it impossible for them to consult together with a view to their common interest.'' . 16. The facts of the present case indicate that all secured creditors including the UTI have been treated alike and in the scheme no separate provision is made for any of the secured creditors, and no distinction at all is made amongst the secured creditors. Almost similar terms of arrangement have been made and offered to all the secured creditors. No preferential treatment is given to any of the secured creditors and they were treated alike for all purposes under the scheme making similar provision o arrangement for all of them. The scheme does not provide for any special treatment to any of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he accounts of the company to redeem the debentures must be treated as moneys set apart to meet a known liability. It was, Therefore, held that debentures have to be shown in the company's balance sheet of the year as a ''liability'. In paragraph 12, the Supreme Court held that the debentures were nothing but secured loans and merely because the debentures were not redeemable during the accounting period, the liability to redeem the debentures did not cease to exist, and that the same was a known liability. The aforesaid conclusion was arrived at also in view of the fact that in the form of balance sheet prescribed by the Act in Schedule VI, the secured loans have to be shown under the heading ''liabilities'' which also included debentures amongst others such as loan and advances, loans and advances from banks, loans and advances from subsidiaries and other kind of loans and advances. Therefore, the aforesaid decision conclusively holds that debenture is only a security like any other security. A very extensive argument was made by the counsel for the UTI to prove and establish that the Debenture Holder forms a separate class distinct from other secu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vision for known liability represented by corresponding assets o the balance sheet and, Therefore, it cannot be said to be a reserve as there is no physical money available in a separate account for redemption of debentures as has been clearly pointed out by the Supreme Court in paragraphs 3 and 4 in National Rayon Corporation Ltd (supra). 18. In the present case also the UTI has a commonality of interest of securing their dues and, Therefore, their rights are not dissimilar to the rights of other secured creditors. There was commonality of interest and no conflict of interest amongst all the aforesaid secured creditors including the objector and, Therefore, the aforesaid submission of the objector is without any merit. Issue No.3: 3/4th of the value of the creditors.: 19. Next major thrust was made and substantial argument was advanced by the objector UTI to the effect that 3/4th of value of the creditors did not vote in favor of the scheme and, Therefore, requirement of sub-section (2) of section 391 was not complied with and could not be satisfied and, Therefore, the scheme should be deemed to have been rejected in terms of the provisions of sub-section (2) of section 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld be adjusted against the original principal amount of ₹ 4603.01 lakhs. Placing reliance on the said contents it was submitted by Mr. Chidambram that as the objector has confirmed receipt of a sum of ₹ 1074 lakhs from the petitioner and the said amount was adjusted towards the principal amount of ₹ 4603.01 lakhs, Therefore, the remaining principal amount would be ₹ 3529 lakhs. I have perused the contents of the aforesaid letter dated September 11, 2001. The said letter relates to one time settlement whereby the UTI has intimated its decision stating that it has examined company's request and the Trust is agreeable for one time settlement of ₹ 5260.74 lakhs on the basis as mentioned therein. There are several conditions attached to the aforesaid letter . Subsequently, however, the said proposal was cancelled by the Trust in terms of its subsequent letter. Therefore, the aforesaid proposal has fallen through and the said amount of ₹ 1074.40 lakhs which was paid by the company and proposed to be adjusted against the original principal amount of ₹ 4603.01 lakhs could not have been so adjusted. In that view of the matter, the position woul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... representing 3/4th of the value of creditors had agreed to the arrangement propounded by the petitioner company and, Therefore, there was compliance of the provisions of section 391(2) of the Companies Act in the present case. The aforesaid objection raised by the objector is also found to be without merit for the aforesaid reasons. Issue No.4: Joint meeting of secured creditors and working capital providers. 21. The next contention was that holding of the meeting of the creditors and the working capital providers together was also illegal. It was also submitted that the working capital providers could not have been included in the list of secured creditors a no sacrifice is made by the aforesaid working capital providers. The aforesaid contention appears to be unacceptable in view of the fact that under the Scheme working capital providers have also to make sacrifices in the following manner:- (a) Interest rate, so far working capital providers are concerned, would stand reduced from existing agreed rate to 12% per annum. (b) Interest of working capital providers from January 1, 2003 to December 31, 2003 would be converted into funded interest term loan on which no i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r in the scheme on the ground that the aforesaid ratio is unjust and improper. It was submitted by the counsel appearing for the objector that he aforesaid exchange ratio is based on the unedited report as on March 31, 2003 as provided by the petitioner on record and no independent investigation/enquiry was made regarding such valuation by the said Chartered Accountant which is established for the said valuation report. It was also submitted that the valuation report as submitted by M/s. S.S. Kothari is based on capital asset pricing model approach. Counsel for the objector submitted that there is hazard involved in practical application o the CAPM approach in a country like India. In support of the said contention a reference was made to the book written by M.Y. Khan and P.K. Jain on `Financial Management', Text and Problems (Second Edition). Particular reference was made to pages 33 and 337 of the said book. However, when the report of the Chartered Accountant, M/s. S.S. Kothari is scrutinised it would be apparent there from that the said report took notice of several factors and various methods and thereafter it proposed an exchange ratio taking a summary of the various meth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... formulating the proposed scheme of compromise and amalgamation an expert opinion was obtained by the respondent-company as well as the transferor-company, namely, MFL on whose board of directors, the appellant himself was a member. C.C. Chokshi and Co., a reputed firm of chartered accountants, having considered all the relevant aspects suggested the aforesaid exchange ratio keeping in view the valuation of shares of respective companies. It must at once be stated that valuation of shares is a technical and complex problem which can be appropriately left to the consideration of experts in the field of accountancy......'' . 25. In this connection, reference may also be made to the decision of the Supreme Court in Balco Employees Union (Regd) v. Union of India and others, (2002)ILLJ550SC , wherein the Supreme Court in paragraph 94 has held as follows:- ''94. The offer of the highest bidder has been accepted. This was more than the reserve price which was arrived at by a method which is well recognised and, Therefore, we have not examined the details in the matter of arriving at the valuation figure. Moreover, valuation is a question of act and the Court will not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be allotted to the shareholders of the transferor company has been worked out by a recognised firm of chartered accountants who are experts in t e field of valuation and if no mistake can be pointed out in the said valuation, it is not for the court to substitute its exchange ratio, especially when the same has been accepted without demur by the overwhelming majority of the shareholders of the two companies. The aforesaid ratio was also accepted by this Court in Jindal (India) Ltd. v. Cold Rollings India Pvt. Ltd, (1998) 1 Comp. L.J. 36. 29. In Hindustan Lever Employees' Union's case (supra), it was again held by the Supreme Court that the jurisdiction of the Court in sanctioning a claim of merger is not to ascertain mathematical accuracy, if the determination satisfied the arithmetical est. It was further held that a Company Court does not exercise an appellate jurisdiction. In the said decision it was held as follows:- ''..... The Court's obligation is to be satisfied that valuation was in accordance with law and it was carried out by an independent body. The High Court appears to be correct in its approach that this test was satisfied even though t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 30, 2001. The next balance sheet f the company should have been prepared for the period as on September 30, 2002. However, the company made a representation before the Competent Authority, namely, the Registrar of Companies for extension of time. The aforesaid request of the company or extension of time has been granted and the same stood extended by letter dated 29.10.2002 for holding the Annual General Meeting of the company up to 29.9.2003. Therefore, in view of the aforesaid extension granted, the accounts for the current year a extended have to be finally audited and placed before the Annual General Meeting to be held on or before September 29, 2003. The company has filed the latest available audited accounts up to September 30, 2001. unedited balance sheet, however, for the period up to September 30, 2002 was prepared and circulated and, Therefore, it must be held that the latest balance sheet and the latest financial position was available on record and that there is no default of the petitioners on that score also. Issue No.7: All relevant materials were not disclosed. 32. It was next submitted that the company has failed to disclose all material interests as is require ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the annexures. The aforesaid position cannot be accepted as the document at pages 603 and 604 clearly indicate that the aforesaid annexures to the scheme of arrangement were circulated to the members and the creditors and, Therefore, the said contention also cannot be accepted. The scheme proposed, which is part of the record, when read with the allocation of the debt of the lenders, would depend upon the option exercised by each one of them, i.e., from Options A, B and C. 34. The amount of sacrifice that is to be made under the scheme by each of the lenders would depend upon the option exercised by such lender. Even the UTI was aware of the aforesaid position and also of the sacrifice to be made as each option clearly s ells out the degree of sacrifice to be made by each of the lenders including the working capital providers. It is also understood that the sacrifice to be made by each of the lenders cannot be the same as it was open for each of the lenders to select i s own option and as the sacrifice to be made by a lender opting for one option would always be different from the sacrifice to be made by a lender opting for the second category of options. However, it is also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest thereon on due date or redeem its debentures on due date or pay dividend and such failure continues for one year or more; . Provided that such person shall not be eligible to be appointed as a director of any other public company for a period of five years from the date on which such public company, in which he is a director, failed to file annual accounts and annual returns under sub-clause (A) or has failed to repay its deposit or interest or redeem its debentures on due date or pay dividend referred to in clause (B). . xx xx xx'' . . 38. It was submitted that the petitioner company-Siel Ltd. was in default since 1998 as the company failed to redeem the debentures of the objector and, Therefore, the directors of the petitioner company as on the effective date of the scheme are disqualified to become the directors of any public company for five years. It was also submitted that as the petitioner company failed to redeem the debentures on the due date, the directors of the petitioner company have to resign as per provisions of law, and n order to circumvent the same the present scheme has been so framed in a manner that the directors who had resigned could pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... District Judge, and Therefore, no such transfer of land as envisaged in the scheme could be made without obtaining permission from the District Jud e. The aforesaid contention on behalf of the objector was refuted by the counsel appearing for the petitioner company. It was shown that the petitioner company pursuant to the orders of the Supreme Court in M.C. Mehta's case (supra) has surrendered 68 of the land and has also made provision only to retain 32% of the land for its own utilisation. What is proposed under the . scheme is transfer of the aforesaid portion of 32% of the land which the company is entitled to retain and utilise. In this connection reference may be made to the letter of the petitioner to the Delhi Development Authority dated April 14, 2003 wherein t was specifically mentioned by the company that all encumbrance on the 68% of the land has been removed by the company and it is in position to hand over possession of the land to be surrendered pursuant to the orders of the Supreme Court. The Delhi Development Authority was requested to withdraw the execution application pending before the District Judge whereupon the company undertook to hand over the possession ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been laid down and agreed upon, such personal guarantee was given by the promoter director, namely Shri Siddharth Sriram, to the term lenders, and Therefore, the contention that the value of the land was fixed arbitrarily has no relevance and has to be rejected. 40. Under these circumstances and in the light of the aforesaid discussion, it is held that the aforesaid objection also has no basis. 41. In terms of the aforesaid discussion, the various issues which have emerged during the course of arguments stand crystalised, discussed and decided. The objections raised by the two objectors are, Therefore, found to be without any merit and the same are dismissed. Having held thus, I find no impediment in granting sanction to the proposed scheme of arrangement. 42. However, the aforesaid sanction to the scheme, in my considered opinion, is to be granted only on fulfillment of one condition. It was found by me during the course of my discussion, as stated hereinbefore, that the UTI had demanded parity with all other lenders on funding of interest. It is true that the UTI failed to accept the option when it was given to the UTI at the time of earlier debt restructuring package of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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