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TMI Blog2012 (11) TMI 1338X X X X Extracts X X X X X X X X Extracts X X X X ..... the applicant-company pending consideration and approval of the scheme of arrangement and compromise. 3. Both the company applications are filed along with typed set of papers enclosing copies of memorandum of articles and association and financial statement of the company, board resolution, summary prospects of the applicant-company, order of this court appointing provisional liquidator in C. P. No. 180 of 2009, scheme of arrangement and compromise as annexure F, certificate issued by the chartered accountant certifying the list of class creditors and draft explanatory statement as annexure H. 4. The applicant-company/Agnite Educational Ltd. (hereinafter shortly referred to as "AEL") has in the affidavit filed in support of the applications explained the particulars regarding incorporation of the company, change of its name, main objects of the company, the authorised share capital, issued, subscribed and paid-up capital, the circumstances under which the scheme of arrangement, is proposed between the company and the scheme creditors, salient features of the same, benefits to be derived from the proposed scheme and advantages of the same to all associated with the comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tive clients. As the company is not having enough resources and investment for the growing business, the present scheme of compromise is proposed, to protect the interest of the stakeholders, shareholders of the company to enable the company to get over the crisis and to revive itself. 7. In 2009 one of the secured creditors/Hong Kong and Shanghai Banking Corporation Ltd. (shortly referred to as HSBC) filed C. P. No. 180 of 2009 for winding up of the company and for appointment of official liquidator and the company petition was admitted and OSA was filed challenging the order of the High Court and the proposed scheme of arrangement and compromise is entered into without prejudice to the right of the company in the OSA. The company has in the proposed scheme admitted that the future earning potential of the company is the basis for entering into the compromise and expressed confidence and faith that the scheme on becoming effective and operative will enable the company to pay off its debts to all class creditors in full and final settlement in the manner as referred to in the scheme with simple interest at 6 per cent. per annum and without any penal charges. 8. It is further stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plication No. 721 of 2012 without giving any notice to the objector before or after filing of the application as contemplated under the Companies (Court) Rules, 1959. 12. In the affidavit filed by the assistant manager of the objector/bank, it is contended that the proposed scheme is lacking in bona fides and it is a sham and is not in the interest of the company or public and the proposed repayment schedule of the debts, due to the scheme creditors is not feasible and the scheme is bereft of particulars regarding the source of funds and the scheme of arrangement does not disclose any concrete funding source. It is also seriously contended that the list of creditors produced along with the scheme is fabricated misleading and warrants detailed enquiry and particulars of other unsecured creditors are omitted to be furnished and they are excluded from the scheme and the scheme is hence filed with mala fide intention to delay winding up proceedings initiated by the objector. It is further contended that in the event of the scheme being sanctioned, the same will be binding on the objector and they are the interested parties to be heard even at the ex parte motion stage. 13. Learned co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the application to the petitioner in winding up petition, if any pending, is made mandatory. In this case admittedly, no such advance notice is given by the applicant-company to the objector herein, who is the petitioner in the winding up petition, which is pending on the date of filing of this petition. The averments raised in the affidavit filed by the objector reveals that eSys Information P. Ltd., has also filed another company petition for winding up of the company and the petitioners in both the company petitions are admittedly not given any notice in the stay application. 18. Learned counsel for the objector cited the following authorities against maintainability of the stay application without one such advance notice to the petitioner in winding up petition (i) Sharp Industries Ltd., In re [2005] 60 SCL 297 (Bom) and (ii) Central Bank of India v. Roofit Industries Ltd. [2004] 51 SCL 261 (Bom.). 19. The Bombay High Court has in both the cases above cited directly dealt with the objection raised herein as to whether advance notice to the petitioner in the winding up petition in the application under section 391(6) of the Companies Act is mandatory. In Central Bank of I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 2004 was ordered directing the meeting to be held with usual direction regarding holding and convening of the meetings. While doing so, interim order was passed in Company Application No. 339 of 2004 granting stay for period of twelve weeks. The creditors of the company moved company applications for vacating the interim stay order made in Company Application No. 339 of 2004 on more than one ground. One of the grounds raised therein is referred to in paragraph 10 of the order that notices of the hearing of the application ought to have been given by the company to the applicants under rule 71 of the Companies (Court) Rules. The objection regarding non compliance of rule 71 is dealt with from paragraph 32 onwards in the judgment. Though it is sought to be argued before the Bombay High Court on behalf of the company that as the proceeding of winding up petition is suspended in view of the pendency of the appeal before the AAIFR, the winding up petition cannot be treated as pending, as such, no advance notice is necessary in the stay petition filed under section 391(6) to the petitioner in the company petition. The Bombay High Court negatived the contention by relying upon the Supre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uiry and certain contingent creditors and other unsecured creditors, who initiated legal proceedings for recovery of the amount due to them and obtained decrees shall be deemed to be in the same class as the other unsecured creditors, but are omitted from the present scheme and UCO Bank who has initiated proceedings before the Debts Recovery Tribunal and eSys Information Technology P. Ltd., who is the petitioner in the winding up petition, are omitted to be included in the list. It is, seriously contended by learned senior counsel for the objector that convening of the meeting for consideration and approval of the scheme as called for is not a matter of course and automatic and as the proposal of compromise is not confined to the company or its creditors if any, the court under section 391(2) will have to be satisfied about the reasonableness of the compromise, public interest or creditors' interest and bona fides of the applicant. It is contended, that the courts rule under section 393(1) is very special and useful vital and pragmatic and very important and as the court is empowered to supervise the scheme, the court is bound to examine the essential features of the scheme at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9] 89 SCL 109 (SC); and (x) Cash and Carry Wholesale Traders P. Ltd., In re [2010] 1 CTC 300. 26. The authorities cited on behalf of the applicant-company are : (i) Rainbow Denim Ltd. (supra) and (ii) Chembra Orchard Produce Ltd. (supra). 27. The general principles laid down in all the authorities cited on behalf of the objector are that the proposal for the arrangement of compromise is not confined to the company or its liquidator and the company court while deciding the application, has to consider whether the company is qualified to sponsor a scheme, motive and real intention of the company behind sponsoring the scheme, whether the company, is really intending to save itself from liquidation or to clear up part or whole of the amount due to class creditors, whether all similarly placed are covered under the scheme and whether all statutory informations are available. The court is further bound to consider the pros and cons of the scheme with a view to finding out whether the scheme is fair, just and reasonable and is not contrary to any provisions of law and it does not violate any public policy. The court is justified in refusing to sanction the scheme if the court finds th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the notice of hearing at the threshold stage of issuing direction to convene meeting is required to be given to its members, shareholders or creditors. 30. In this regard, the relevant rules to be looked into are rules 67 to 69, which read as follows : "67. Summons for directions to convene a meeting.-An application under section 391(1) for an order convening a meeting of creditors and/or members or any class of them shall be by a judge's summons supported by an affidavit. A copy of the proposed compromise or arrangement shall be annexed to the affidavit as an exhibit thereto. Save as provided in rule 68 hereunder, the summons shall be moved ex parte. The summons shall be in Form No. 33, and the affidavit in support thereof in Form No. 34. 68. Service on company.-Where the company is not the applicant, a copy of the summons and of the affidavit shall be served on the company, or, where the company is being wound up, on its liquidator, not less than 14 days before the date fixed for the hearing of the summons. 69. Directions at hearing of summons.-Upon the hearing of the summons or any adjourned hearing thereof, the judge shall, unless he thinks fit for any reason ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e parties interested in the proposed scheme of arrangement and compromise. 34. The hon'ble Supreme Court in the judgments cited on the side of the petitioners Rainbow Denim Ltd. (supra) Chembra Orchard Produce Ltd. (supra), dealt with this aspect directly and answered the issue in negative. The short question which arose for "determination" in the civil appeal is referred to in paragraph 1 of its judgment in Chembra Orchard Produce Ltd. (supra) "whether the application filed by the company under section 391(1) of the Companies Act is required to be heard and decided ex parte as per rule 67 of the Rules". 35. The few facts which are relevant to duly understand the view of the Supreme Court are that Company Applications Nos. 354 to 359 of 2003 are filed by the company under sections 391 to 394 of the Companies Act. When the company applications came before the company court, query was raised as to whether it was necessary to hear the shareholders before issuing direction for holding meeting of the shareholders or creditors. The Division Bench of Karnataka High Court on a reference answered the above question of law stating that hearing of all parties was nec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issued as and when the meeting is ordered to be convened, the notice of the meeting is required to be given to the creditors and/or members or such other classes enumerated in rule 73. Similarly, under rule 74 advertisement of the notice of meeting is also required to be published in such newspapers and in such manner as the judge may direct. This is to be supported by affidavit of service under rule 76. The analysis of the above rules indicates that there is a clear dichotomy between the threshold stage of issuance of directions to convene a meeting and the subsequent stage of a notice of meeting which is contemplated by rule 73 and for that precise reason rule 67 states that the summons shall be moved ex parte. Our view is supported by various judgments of this court and the High Courts . . . In the case of Sakamari Steel and Alloys Ltd., In re [1981] 51 Comp Cas 266, the learned single judge of the Bombay High Court held that section 391(1) is not a sign-post but a check-post whereat it is a duty of the court to examine the genuineness and the bona fides of the scheme for itself. A reading of the above judgment would, therefore, show that at the stage of issuance of summ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vision Bench of our High Court in Cash and Carry Wholesale Traders (P.) Ltd., (supra) cited on the side of the objector. The Division Bench has referred to the same while making distinction between the cases falling under rules 67 and 68 and the Division Bench is pleased to observe that the observation of the Supreme Court was made in an application under rule 67 and as per which, in the cases arising out of rule 67, it is not necessary for the company to give notice of hearing to the creditors, members or shareholders. Whereas the same is not applicable to cases falling under rule 68, the Division Bench held the observation of the Supreme Court to be inapplicable to the facts of the case in hand only because the same falls under rule 68. The Division Bench has in paragraph 8 observed as follows : "8. This was approved in [2009] 147 Comp Cas 677; [2009] 2 SCC 547 (Chembra Orchard Produce Ltd. v. Regional Director of Company Affairs) which was strongly relied on by the appellant. In Chembra Orchard Produce Ltd. v. Regional Director of Company Affairs [2009] 147 Comp Cas 677 ; [2009] 2 SCC 547, the Supreme Court was dealing with an application under rule 67. Paragraph No. 7 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scheme at the stage of filing application under section 391(1). The question as to whether the petition under section 391(1) shall be moved ex parte under rule 67 or not is not dealt with by the Madras High Court. 42. The next authority cited by the objector in National Textile Workers' Union (supra) arises out of proceedings in winding up petition and as the procedure for dealing with winding up and petition for amalgamation are not the same, the ruling is not applicable to the facts of the present case, even otherwise, the Full Bench of the Supreme Court has in National Textile Workers' Union (supra) case decided the right of the workers of the company to be heard in the main winding up petition. It cannot be disputed herein that the right to raise their objection if any, is available to the shareholders or creditors, when the scheme of arrangement after approval in the meeting is placed before the court for sanction. 43. The next authority cited on behalf of the objector is Ramakrishna Industries (P.) Ltd. (supra), wherein, the case is related to winding up and not amalgamation. In that case, the question whether the hearing of the respondent is necessary at threshold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 47. As far as the proposed scheme of arrangement is concerned, the same is entered into between the company and class of creditors. It is settled law that the court is at the initial stage bound to consider and prima facie satisfy about the genuineness of the scheme and it can be only in the light of the averments raised in the petition and also in the light of the various clauses incorporated in the draft scheme. The petitioner-company has attached copy of the explanatory statement as required under section 393 of the Companies Act as annexure H along with the application, in and under which relevant particulars regarding the main objects of the company as per the memorandum of association, nature of the business activities of the company, its turn over and net profit for the last 10 years, its future plans, terms and conditions of the settlement and compromise, projection and future business of the company and the expected cash flow of the company, pre and post scheme shareholding pattern, details of the litigation and proceedings, directors and shareholding of the directors and the documents available for the articles of association are furnished. 48. The list of class credit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roxy can be obtained free of charge at the registered office of the applicant-company and/or at the office of its advocates shall be published once in each of the newspapers, namely, English daily New Indian Express and Tamil daily Dinamani ; (iii) That, in addition, at least 21 clear days before the said meeting of the creditors of the applicant-company to be held as aforesaid, a notice informing the said meeting at the place, date and time aforesaid, together with the copy of the scheme of amalgamation and arrangement, a copy of the statement required to be sent under section 393 of the Companies Act, and prescribed form of proxy, shall be sent by registered post with acknowledgment due addressed to each one of the creditors to their respective addresses as registered in the books of the said company or to their last known addresses ; (iv) That the settling and approving of the form of advertisement, form of proxy, form of notice, statement required to be furnished pursuant to section 393 of the Companies Act to accompany the notice by the Assistant Registrar of this court is dispensed with. The applicant-company undertakes to : (a) issue notice, convening the meeting of th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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