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TMI Blog2012 (11) TMI 1341X X X X Extracts X X X X X X X X Extracts X X X X ..... thereafter, changed to 'Model Housing and Finance Limited', and a fresh certificate of incorporation was issued on 11.02.1992. Subsequently the petitioner again changed its name to 'Model Financial Corporation Limited', and a fresh certificate of incorporation was issued by the Registrar of Companies, Andhra Pradesh on 20.08.1993. The registered office of the transferor company is situated at Hyderabad. Its authorised share capital is Rs. 15,00,00,000/- divided into 1,00,00,000 equity shares of Rs. 10/- each, and 50,00,000 preference shares of Rs. 10/- each. The issued, subscribed and paid up share capital of the transferor company, as at 30.09.2001, was Rs. 3,99,92,000/- divided into 39,99,200 equity shares of Rs. 10/- each fully paid up. The main objects, for which the transferor company was incorporated, were to purchase, lease or otherwise acquire land, plots, construct and erect houses, buildings, flats on such land or plots, pull down old structures or acquire, rebuild, enlarge, improve, expand, alter existing houses, buildings and flats; to act as contractors for the construction of buildings of all descriptions, roads, bridges, dams etc; and to carry on and undertake the bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in C.A.No.531 of 2002 dated 11.07.2002, granted stay of all proceedings, including filing of civil suits, for a period of eight weeks. The said interim order was extended until further orders on 04.09.2002. Thereafter, by order dated 10.12.2002, this Court directed that the interim order, passed in C.A.No.531 of 2002, be continued till the final disposal of C.P.Nos.83 and 84 of 2002. This Court, however, observed that the transferor should file an undertaking before this Court that they would not dilute, or in any manner alter, the securities furnished in favour of the creditors. The secured creditors, i.e., A.P. Mahesh Cooperative Urban Bank Limited, State Bank of Hyderabad, Lakshmi Vilas Bank Limited, Andhra Pradesh Industrial Development Corporation (APIDC) etc were permitted to come on record. 5. By order, in C.P.Nos.83 and 84 of 2002, dated 25.06.2003, this Court rejected sanction of the proposed scheme of arrangement, and dismissed both the Company Petitions holding that the meetings of the secured creditors of the transferor company, and one of the secured creditors of the transferee company, were not held; the Reserve Bank of India had cancelled the certificate of registra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subject matter of mortgage or guarantee in whatever form. 7. Both OSA.Nos.69 and 71 of 2003 were allowed, by order dated 30.01.2006, by the Division Bench holding that the Chit Funds Act, 1982 did not apply to the State of Andhra Pradesh, as no notification had been issued by the Central Government under Section 1(3) of the Chit Funds Act, 1982 with respect to the State of Andhra Pradesh. The order passed in C.P.Nos.83 and 84 of 2002 dated 25.06.2003 was set aside, and the Company Petitions were remanded back for fresh hearing. The Division Bench also allowed an application filed by Ms.Leela Devi to be arrayed as a respondent in the Company Petitions. As a result of both the OSAs being allowed the interim order, passed in C.A.Nos.1126 and 1405 of 2003 in OSA.No.69 of 2003 dated 24.12.2003, ceased to remain in force (Mrs. Kavita Trehan v Balsara Hygiene Products Limited AIR 1995 SC 441 and Shipping Corporation of India Limited v Machado Brothers AIR 2004 SC 2093) ; and the earlier interim order, granting stay of all proceedings including filing of civil suits, passed in the Company Petitions stood revived. 8. Before sanctioning a scheme of arrangement, the Court must be satisfied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all, but were prevented from doing so; the police were asked to be present to avoid any untoward incident during the course of the meeting; the views expressed by some of the members, who were the shareholders of the company, had been noted; shareholders holding 2,09,37,400 shares had voted in favour of the proposed scheme of arrangement, and shareholders holding 7,000 shares had voted against the scheme; the total value of the valid bond holders, who voted for the proposed scheme, was Rs. 6,44,02,000/-; and the value of the bond holders, who voted against the scheme, was Rs. 32,66,000/-. 10. On the question whether, in a scheme of arrangement between the company and its members and a class of its creditors (bond-holders) a meeting of the other classes of creditors, (both secured and unsecured), must be held, it is necessary to note that Section 391(1) enables the Court, on the application of a company or a creditor or a member of the company, to order a meeting of the creditors/or the members "as the case may be" to be held and conducted in such manner as the Court directs. Under Section 391(2), if a majority representing 3/4th in value of the creditors or members agree, in the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct does not contain a specific provision for notice being given to the creditors at any stage either prior to the making of the order or subsequent thereto, except in so far as the creditors may have notice of it by public advertisement, (Union of India v. Asia Udyog Pvt. Ltd (1974) 44 Comp Cas 359 (Delhi)), and that the legislature has cast a duty on the Court to ascertain whether the scheme affects the interests of the creditors to such an extent that holding of their meeting is essential and, if the Court is of the view that the interests of the creditors would be adversely affected, it could refuse to sanction the scheme unless their consent has been obtained. (Ansal Properties and Industries Ltd., In re (1978) 48 Comp Cas 184 (Delhi)). 12. Another facet of this view is that, under Section 391 of the Act, a compromise or arrangement is either between a company and its creditors or between a company and its members. In case of an arrangement between the company and its members, the arrangement is the result of an agreement between the company and its members and there is, therefore, no provision for the participation of persons other than the members of the company to vote on a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tatement was for Rs. 3.72 lakhs; there were discrepancies in the documents, such as non-availability of insurance, non-registration of charges, and non-filing of Form Nos.8 and 13 with the Registrar of Companies; and the company was due Rs. 272.63 lakhs to the State Bank of Hyderabad as on 26.09.2002. While Sri V.S. Raju, learned Counsel for the petitioners, would submit that the dues of State Bank of Hyderabad were subsequently repaid, no document has been placed before this Court in proof thereof. The affidavit filed by State Bank of Hyderabad, in C.A.No.794 of 2002, details the dues to various secured creditors of the transferor company as on 26.09.2002: Bank Rupees in lacs. State Bank of Hyderabad 272.63 Union Bank of India 149.95 Union Bank of India 71.22 Bank of Maharastra 95.00 Andhra Bank 67.04 Canara Bank 42.62 Indian Bank 125.00 A.P. Mahesh Cooperative Bank Ltd. 75.00 15. In the counter affidavit dated 18.07.2007, filed on behalf of APIDC, it is stated that APIDC had invested Rs. 30,00,000/- for purchase of 2,00,000 equity shares of Rs. 10/- each at a premium of Rs. 5/- per share; in addition, they had sanctioned the transferor company, on 18.01.1997, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... due to the bondholders, has been repaid. In this context it is necessary to note that this Court, by its proceedings dated 23.02.2012, acceded to the request of Sri V.S. Raju, learned Counsel for the petitioners, for grant of a week's time to file a statement giving details of the amounts paid by the petitioners to the chit subscribers. Thereafter the matter underwent several adjournments, despite which no affidavit, furnishing details of the amounts, if any, paid either to the bondholders or the other secured or unsecured creditors of either of the two companies, has been filed. 19. As is evident from the earlier order passed by the Learned Single Judge, in C.P. Nos.83 and 84 of 2002, even the transferee company did not obtain the no objection/consent of IREDA, New Delhi, to the proposed scheme of arrangement though the transferee owed them Rs. 3,69,12,000/- as at 31.03.2001. It does not also appear that the transferee had obtained the no objection/ consent of their creditors to the proposed scheme of arrangement i.e., creditors who had advanced term loans, overdrafts and loans under hire-purchase agreements to the transferee company. Failure of both the transferor and transferee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ), In re Aradhana Beverages and Foods Co., Ltd., 1998 (93) Company Cases 899 (Del), and K.E.C. International Ltd. v. Karmik Employees 2000 (1) CLJ 351; In Re Deepika Chit Fund (P) Ltd. (2004) 3 ALD 879). 21. Both the Company Petitions were filed on 13.06.2002, and it is asserted therein that no investigations or proceedings are pending under Sections 235, 237 or other provisions of the Act or under any Act against the transferor or the transferee companies. The Balance Sheets of the transferor dated 30.09.2001, and that of the transferee dated 31.03.2001, were filed along with the Company Petitions. Though both the Company Petitions have been pending on the file of this Court for the past more than a decade, none of the subsequent Balance Sheets of either the transferor or the transferee companies have been placed before this Court. The requirement of both the companies placing their latest financial position, and the latest Auditor's reports on the accounts of their companies, as stipulated under the proviso to Section 391(2), is not satisfied. 22. Section 393(1) (a) stipulates that, where a meeting of the creditors or any class of creditors, or of members or any class of member ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transferee in the manner prescribed by clauses 7 to 9 of the scheme of arrangement. 24. The manner of repayment of each bond of Rs. 1,000/- is:- (a) Shares in the transferee company for Rs. 125/- would be allotted towards 50% of each bond i.e., for an extent of Rs. 500/- of each bond of Rs. 1,000/- (clause 7.1 of the scheme); (b) as a consequence thereof, each bond holder is required to forego Rs. 375/- for each bond of Rs. 1,000/-; and (c) the remaining 50% of each bond of Rs. 1,000/-, i.e. Rs. 500/-, is to be repaid in the following manner: (i). 50% thereof i.e., Rs. 250/-, for each bond of Rs. 1,000/-, is to be redeemed in cash by the transferee company within thirty days after the transfer date or the effective date whichever is later (Clause 8); and (ii). the remaining balance of Rs. 250/-, on each bond of Rs. 1,000/-, is to be repaid and redeemed after the transfer date, after conversion into equity shares as per clause 7 of the scheme, and part-redemption as per clause 8 of the scheme, by 30.09.2003. (Clause 9) 25. As the scheme defines "transfer date" to mean 30.09.2002, and the "effective date" to mean the date on which the certified copy of the order of this C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , per bond of Rs. 1000/-, latest by 30th September 2003. The subsequent events show that the transferor never had any intention of adhereing to this time frame. As the mandatory provisions of Section 393(1)(a) of the Companies Act are not satisfied, this Court must refuse to accord sanction to the proposed scheme of arrangement on this ground also. 26. A reading of Section 394-A of the Act shows that the scheme of arrangement would not be sanctioned unless the Court has considered the representation of the Central Government. In the counter affidavit, filed on behalf of the Central Government by the Registrar of Companies, reference is made to the contents of the scheme, and it is contended that assignment of the book debts of the transferor in favour of the transferee, and the proposal of the transferee to settle the dues of the bondholders of the transferor, were outside the purview of the business of the transferee and the transferor companies, and against the provisions contained in clause 12 of the Chit Funds Act, 1982. In view of the order of the Division Bench, in OSA No.69 and 71 of 2003 dated 30.01.2006 referred to hereinabove, this objection of the Central Government may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt would, of course, take into account the fact that it has been approved by a big majority vote, but it would not shirk its duty to scrutinize the scheme. (Bank of Baroda Ltd. v Mahindra Ugine Steel Co. Ltd. (1976) 46 Comp Cas 227]). When it exercises the power, conferred on it by Section 391(2), to sanction the scheme of compromise or arrangement, the Court, by its act, is imposing the scheme on the dissenting members of that class. Before taking such an action, it would be open to the Court to examine the scheme before imposing it on the unwilling/dissenting members of the class. Even if all the statutory formalities are duly carried out, the Court has still the discretion either to sanction or refuse to sanction the scheme. (Mahindra Ugine Steel Co. Ltd.25 and Bengal Hotels P. Ltd. In re (1977) 47 Comp Cas 597 (Guj)). 29. The arrangement must fulfill some felt need, some purpose, some object and that must have some co-relation with public interest. The Court is charged with a duty to ascertain whether its affairs have been carried on not only in a manner not prejudicial to its members but also that it is not against public interest. The expression "public interest" must take ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness taking a commercial decision beneficial to the class represented by them for whom the scheme is meant. (Miheer H. Mafatlal3). 32. Clause 1.4 of the scheme of arrangement defines "bonds" to mean the secured bonds issued by the transferor company and assigned under this scheme to the transferee company and remaining to be redeemed inclusive of interest accrued thereon but not paid as on 30th September, 2002. Clause 1.6 of the scheme defines "transfer date" to mean 30th September, 2002 i.e., the date of assignment and vesting of the shares and bonds in the transferee company, pursuant to the scheme, as per the orders of the High Court of Andhra Pradesh. Clause 1.7 defines "effective date" to mean the date on which a certified copy of the order of the High Court of Andhra Pradesh is filed with the Registrar of Companies, Andhra Pradesh, Hyderabad, under Section 391(2) of the Companies Act, from which date the scheme is to come into effect. Clause 1.8 defines "record date" to mean the date, after the transfer date, fixed by the Board of Directors of the transferee company as the date on which the bondholders shall be eligible to be allotted equity shares of the transferee compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scheme stipulates is that 50% of the value of the bonds i.e., for Rs. 500/- shall be converted into 1/4th its value i.e., shares for a value of Rs. 125/- in the tranferee which, in effect, would require each bondholder to forego Rs. 375/- towards the principal amount due to them under each bond of Rs. 1000/-. Even these equity shares are to be issued by the transferee company, in terms of Clause 7.1 of the scheme, only with effect from the transfer date or the effective date whichever is later. While the transfer date has been stipulated, in clause 1.6 of the scheme, as 30th September, 2002, the effective date is defined, under clause 1.7, to mean the date on which the certified copy of the order of this Court, sanctioning the scheme of arragnement, is filed with the Registrar of Companies. As the effective date has not as yet arrived, the transferee company was neither obligated to nor has it issued even these equity shares worth Rs. 125/- for each Rs. 500/- of the bond of Rs. 1000/- each held by the bond holders of the transferor company. Clauses 7.1 and 1.8 of the scheme leave it to the unfettered discretion of the Board of Directors of the tranferee company to fix the date on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lance amount of Rs. 250/- to be paid in cash only after the transfer date and that too after conversion into equity shares as per clause 7 and part redemption as per clause 8, the stipulated date in clause 9 i.e., "30th September, 2003" loses significance, and it is only after clauses 7 and 8 are complied with, does Clause 9 require the transferee to repay Rs. 250/- in cash, for each bond of Rs. 1000/-, to each bondholder, and not by the 30th of September, 2003. The ambiguous language of clause 9 of the scheme has enabled the transferee company to misconstrue the conditions stipulated thereunder as requiring compliance only after clauses 7 and 8 of the scheme are complied with, and not by 30th September, 2003. 36. Both the transferor and the transferee have, in effect, misused the provisions of the Companies Act governing sanction of a scheme of arrangement, and have avoided making payment to the bondholders either in cash or in the form of shares in terms of clauses 7.1, 8 and 9 of the scheme of arrangement. Pendency of these two Company Petitions, on the file of this Court for more than a decade, has enabled the transferee company not only to avoid paying interest, but even the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... em from being proceeded against/prosecuted in a competent Court. I am satisfied that the scheme, as proposed by the petitioners, is against public interest. 39. The proposed scheme requires all bond-holders, (even those who voted against the scheme), to forego Rs. 375/-; receive Rs. 500/- in cash, i.e., Rs. 250/- at two different stages; Rs. 125/- in the form of shares of the transferee for each bond of Rs. 1000/-; and to forego the prescribed rate of interest of 15% per annum, on each bond of Rs. 1000/-, after 30.9.2002. It cannot, therefore, be said to be fair, just and reasonable to the concerned bond holders. As the scheme affects the interests of the other secured creditors also, failure to obtain their consent would render the scheme illegal and against public interest. The petitioners have not been able to discharge the burden of showing that the scheme is such that a man of business would reasonably approve or is one which can, by reasonable people conversant with the subject, be regarded as beneficial to those who are likely to be affected by it. Even from the point of view of a prudent and reasonable businessman, taking a commercial decision, the scheme, when read as a w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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